First Brands exploited weaknesses in North American factoring practices to defraud lenders out of billions of dollars, a court-appointed examiner has said, citing interviews with company executives.
Evidence collected since the collapsed auto parts supplier’s bankruptcy shows “widespread fraud” against third-party receivables finance providers, according to an examiner’s report issued April 27 by a Texas bankruptcy court.
It said First Brands obtained financing by submitting spreadsheets containing falsified invoice data to a group of lenders, which included Raistone, Jefferies-owned Leucadia Asset Management, Evolution Credit Partners and Katsumi Global. Katsumi also sold some purchased receivables to ING Belgium and Bank ABC.
At the time of bankruptcy, lenders were owed an estimated US$2.3bn under these programmes.
According to First Brands executives who were interviewed as witnesses, these practices exploited relative weaknesses in North American factoring programmes compared to their European equivalents. The review primarily focused on transactions involving Leucadia and Katsumi.
In European programmes, providers are typically regulated banks that require regular invoice data reporting and direct visibility into accounts receivable, First Brands’ Emea chief executive told examiner Martin De Luca, a partner at Boies Schiller Flexner.
Structures often involved a technical integration between banks and companies’ ERP systems, allowing them to extract data directly rather than rely on submissions prepared manually.
This practice “would rapidly surface discrepancies between reported receivables and underlying commercial activity”, witnesses told the examiner.
European teams at Citi and BBVA were among those to turn down factoring arrangements with First Brands after “identifying concerns” with information provided, a finance and purchasing executive said.
However, witnesses said factoring practices in North America “differed materially” from those in Europe.
North American programmes were “less transparent”, relying on spreadsheets produced manually and uploaded to the PrimeRevenue supply chain finance platform, the report said.
Lenders “typically did not see the actual underlying invoices or verify the data against the invoices stored in [First Brands’] database”, it added.
For example, it said Leucadia “relied on invoice-level data presented in PrimeRevenue” when purchasing receivables, and “did not independently receive or review underlying spreadsheets or invoice documents at the time of purchase”.
“The absence of real‑time oversight, independent verification, and system‑level controls in the North American factoring practices significantly weakened the third-party factors’ ability to detect manipulation or fraud,” the report said.
In practice, First Brands became increasingly reliant on liquidity generated from fraudulent factoring programmes, the examiner said. Before its bankruptcy, some arrangements had rates of 20-30%, which he described as “extraordinarily high” and “significantly above market rates”.
“These elevated rates reflected both the risk profile of the transactions and, as would later become apparent, [First Brands’] desperate liquidity needs,” the report said.
Cash dominion
The examiner’s report also said the way repayment was made under third-party factoring programmes was “critical to the fraudulent scheme”.
Under customer-linked supply chain finance programmes, repayments would be made directly from the buyer to the financing provider. But with third-party programmes, First Brands was responsible for collecting funds itself, before remitting them to the factoring companies.
This arrangement meant First Brands maintained control over the flow of funds and “facilitated the manipulation of receivable data” provided to lenders, the report said.
In Leucadia’s case, the lack of a direct payment structure allowed First Brands to make repayments funded by new factoring activity rather than collections from customers, it said.
This practice was the subject of a lawsuit filed against Leucadia in February by two British Virgin Islands entities, collectively referred to as Eugenia.
The Eugenia entities, which had invested US$25mn in Leucadia’s factoring programmes, said Leucadia had provided documents showing it had “cash dominion” over repayments from obligors. This would have meant any double pledging would have been immediately visible.
But Eugenia’s claim alleged that with First Brands, Leucadia “never had this foundational safeguard” in place. Instead, First Brands would itself transfer funds to Leucadia’s Point Bonita fund.
In doing so, Leucadia “appointed the proverbial wolf… to run the hen house”, it said.
Leucadia, along with fellow defendants Jefferies and Point Bonita, has not yet filed a defence. A Jefferies spokesperson said in February the company “unequivocally did not engage in fraud” and “will vigorously defend against these specious claims”.
The examiner’s report also it has identified US$720mn in transfers to entities connected with First Brands founder Patrick James, who faces separate criminal charges over the scandal.
It said withdrawals were made from both on- and off-balance sheet facilities and routed through multiple entities “for the benefit of Patrick James”.
James has repeatedly denied he carried out fraud. A spokesperson for James did not immediately comment on the examiner’s report when contacted by GTR.
Leucadia, Katsumi, Evolution, ING and Bank ABC either did not respond to requests for comment or declined to comment.
