By Jonathan Stempel
NEW YORK, Jan 29 (Reuters) – The founder of First Brands has been indicted by federal prosecutors for allegedly defrauding lenders out of billions of dollars before the auto parts supplier collapsed into bankruptcy.
Patrick James, 61, who was also First Brands’ chief executive, was charged in a nine-count indictment made public on Thursday with running a continuing financial crimes enterprise, bank fraud, wire fraud and money laundering conspiracy.
His brother Edward James, 60, who had been a First Brands senior vice president, faces most of the same charges.
Both defendants were arrested on Thursday in Ohio and are expected eventually to appear in Manhattan federal court, where the indictment was filed. They could face decades in prison if convicted. A former First Brands executive, Andy Brumbergs, 45, entered a related guilty plea and is cooperating with prosecutors.
The charges add a criminal dimension to the implosion of First Brands, once one of the world’s largest auto parts suppliers, whose Chapter 11 case has disrupted the supply chain for major automakers including Ford and General Motors.
“Patrick James is presumed innocent and denies these charges,” a spokesperson said in an email. “He built First Brands from nothing into a global industry leader and has always been devoted to the success of the company. Mr. James looks forward to presenting his case in court.”
Seth DuCharme, a lawyer for Edward James, said in an email that his client “has conducted himself with integrity and dignity over decades of hard work … We look forward to appearing in New York on his behalf and we have complete confidence in Mr. James.”
A lawyer for Brumbergs declined to comment.
U.S. SAYS FIRST BRANDS FEIGNED SUCCESS
First Brands filed for protection from creditors on September 28 with more than $9 billion of liabilities, sparking fear among Wall Street lenders exposed to the privately held, Cleveland-based company.
Jefferies Financial Group and Switzerland’s UBS are among the most exposed financial firms. Both declined to comment.
First Brands has begun winding down some businesses, while looking for buyers for its other assets.
Patrick James stepped down as chief executive two weeks after the bankruptcy filing.
New management sued him in November, saying he left the company insolvent while transferring hundreds of millions of dollars to himself. Prosecutors echoed that accusation.
“The James brothers obtained billions for First Brands—and millions for themselves—by presenting their lenders with the impression of a successful, growing international business,” U.S. Attorney Jay Clayton in Manhattan said in a statement.
“ The indictment and the guilty plea unsealed today describe a very different reality: a business run through fraud, fake documents, and false financials,” he added.
FAST EXPANSION ALLEGEDLY FUELED BY IMPROPER ACCOUNTING
Founded in 2013, First Brands had by last year become a major supplier of auto parts such as brakes, filters and lighting systems, with about $5 billion in annual sales.
Prosecutors said First Brands financed its growth by borrowing billions of dollars that were secured by inventory and physical assets such as plants and equipment.
But according to the indictment, the Jameses manufactured that growth by defrauding lenders and financing partners through a series of schemes including double- and triple-pledging loan collateral, faking invoices and concealing substantial liabilities.
This allegedly left First Brands vulnerable to cash flow disruptions and potential declines in asset values, while remaining dependent on continued access to capital. The fraud allegedly lasted from 2018 to 2025.
Prosecutors said that as cash dried up and debts mounted, the Jameses “closed ranks” to prevent creditors, auditors and potential asset buyers from seeing First Brands’ dire outlook.
Members of their inner circle allegedly expressed concern in an email that people might “slip and say the wrong thing” to those counterparties, including by revealing First Brands’ dependence on debt and financing arrangements that were off its balance sheet, the indictment said.
The Jameses were indicted six weeks after Clayton’s office unveiled an indictment accusing top executives of subprime auto lender Tricolor of defrauding lenders and double-pledging collateral.
Tricolor filed to liquidate in bankruptcy last September 10, eighteen days before First Brands’ Chapter 11 filing.
FORD, GM TO PROVIDE SOME HELP
At a Thursday hearing in Houston bankruptcy court, First Brands received a judge’s permission to obtain short-term financing from Ford and GM.
The automakers will prepay $48 million for parts over the next week, and perhaps provide more financing week-to-week, to let First Brands continue operating businesses that serve them.
Those businesses employ about 17,000 people in North America.
First Brands has begun winding down its Brake Parts, Cardone aftermarket parts and Autolite spark-plug units, which together employed 4,000 people.
Despite borrowing $1.1 billion after filing for bankruptcy, First Brands said early this month that cash on hand had shrunk to $190 million.
(Reporting by Jonathan Stempel, Dietrich Knauth and Tatiana Bautzer in New York, Editing by Lisa Shumaker and Nick Zieminski)
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