US prosecutors are examining representations made by First Brands and investment bank Jefferies as the car parts maker rushed to refinance debt shortly before it collapsed into bankruptcy, people with knowledge of the investigation have told the Financial Times.
The prosecutors have sent subpoenas, which are legal demands requiring recipients to produce evidence for an investigation, to a range of parties with links to First Brands, according to the people. Investigators are trying to determine whether laws governing securities, bank and wire fraud were violated in the failure of First Brands, which declared bankruptcy in September with nearly $12bn in debt and off-balance sheet financing.
The investigation was seeking evidence of communications made to lenders and potential lenders to First Brands, including financial information, the people said. The investigation is being led by the Manhattan US attorney’s office, the elite outpost of the US justice department that often takes a lead role in prosecuting financial crime.
The requests do not specify which entities are a subject of the investigation, and the receipt of a subpoena does not necessarily indicate that a group is itself under investigation or suspected of wrongdoing. But the issuance of the requests is a sign that Wall Street’s top financial prosecutors are intensifying their attempts to identify how the company fell apart.
A spokesperson for the US attorney’s office declined to comment. Representatives for First Brands and Jefferies declined to comment.
Michael Carlinsky, a lawyer for First Brands’ founder Patrick James, said: “We reject the allegations that Mr. James engaged in misconduct. Mr. James has always acted ethically. We are encouraged that the public is becoming more focused on the conduct and motivations of the various lender groups, who pocketed billions in fees and interest, and is questioning the lenders’ overall claim to having been a victim. We look forward to our day in court and as the facts unfold.”
The FT in October reported that the Department of Justice had launched an inquiry into the circumstances surrounding the company’s collapse.
As concerns mounted about First Brands’ financial accounting and off-balance sheet financing late this summer, the company and Jefferies attempted an unsuccessful $6bn refinancing shortly before its collapse. A person close to Jefferies said the bank was not a subject of the investigation.
The prosecutors are also seeking records of communications during other attempts to save the company before it fell into bankruptcy, such as an attempt to arrange a bridge loan. They are also seeking details of communications about a $1.1bn “debtor-in-possession” loan that was intended to provide the group with emergency funding after its bankruptcy.
In addition, investigators are seeking information about First Brands’ factoring and off-balance sheet financing arrangements.
First Brands relied heavily on factoring, in which companies sell outstanding customer invoices to banks or investors in return for upfront cash.
In a recent filing in its bankruptcy, First Brands, which is now overseen by external restructuring advisers, disclosed that a “forensic review” had found the majority of $3bn in supposed customer payments owed to factoring banks were subject to irregularities. This includes being based on “fabricated” or “inflated” invoices, as well as instances where the same invoice had been financed multiple times.
First Brands last month sued James, alleging he engaged in “fraudulent conduct” and enriched himself and his family by “misappropriating hundreds of millions (if not billions) of dollars from First Brands”.
In a court hearing last month, First Brands’ lawyers presented evidence of an electronic chat between members of the finance team in which the possibility of creating a “dummy invoice” was discussed.
A spokesperson for James has denied the allegations, calling them “baseless and speculative”. A bankruptcy judge found there was no evidence James personally falsified invoices and declined to freeze his personal assets.
