Founder of Auto Parts Maker Charged With Fraud That Wiped Out Billions

First Brands Group founder Patrick James and his brother Edward, a former executive at the company, were indicted in New York following the collapse of the bankrupt auto-parts maker last year.

The duo engaged in a series of schemes to defraud the company’s lenders and financing partners, according to the federal indictment. The brothers faked and inflated invoices for accounts receivable, double- and triple-pledged loan collateral, falsified financial statements and hid liabilities from lenders, the US alleged.

Patrick, 61, and Edward, 60, were arrested in Ohio this morning and are expected to appear in federal court later on Thursday, authorities said.

Related: First Brands Judge Approves Examiner to Probe Fraud Allegations

“Patrick James, together with his brother, Edward James, perpetrated a staggering fraud at First Brands Group,” Jay Clayton, the US Attorney in the Southern District of New York, said in a statement. “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.”

In reality, Clayton said, First Brands was a “business run through fraud, fake documents, and false financials.”

Clayton also revealed that a former company executive, Peter Brumbergs, pleaded guilty to his role in the scheme and is cooperating with prosecutors.

First Brands lenders now face “billions in losses” as a result of the alleged schemes, according to the indictment. The company filed Chapter 11 with just $12 million in its corporate accounts and more than $9 billion in liabilities, court papers say.

The brothers were each charged with nine counts, including continuing financial crimes enterprise, wire fraud, bank fraud, conspiracy to commit wire fraud and conspiracy to commit money laundering.

The top charge, operating a continuing financial crimes enterprise, carries a maximum punishment of life in prison.

“Patrick James is presumed innocent and denies these charges,” his spokesman said in an emailed statement. “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.”

The indictment depicts a series of complex financial maneuvers, including the use of false invoices and deceiving financers to send money to a bill-processing intermediary. While financers believed the money would pay First Brands’ suppliers, it actually went to the company itself, the US alleges.

“Their purpose was to inject additional cash into First Brands at moments when the company was unable to meet its payment obligations with legitimate cash on hand,” the indictment alleged. “Rather than paying suppliers, ’round trip’ funds went toward paying interest on debt, rent, leases, or other operating costs.”

Prosecutors describe repeated deceptions to senior lenders about the company’s off-balance sheet debt. First Brands expressly disavowed such financing even as “the James entities incurred billions of dollars in inventory-backed obligations using First Brands’ inventory,” according to the indictment.

“Predatory” Practices

Patrick James’ lawyers have previously denied similar allegations of wrongdoing asserted by First Brands’ bankruptcy advisers and lenders and attributed the company’s financial troubles to macroeconomic factors like tariffs.

James has also blamed lenders for First Brands’ bankruptcy, saying in court papers that the firms that provided his company with off-balance sheet financing engaged in “predatory” practices and charged onerous fees. Lenders have denied James’ claims and blamed First Brands’ Chapter 11 case on alleged fraud involving the former chief executive officer.

James resigned as chief executive officer in October, shortly after First Brands filed Chapter 11.

Edward James also exited as executive vice president soon after the company sought court protection, according to bankruptcy papers. He has been sued by the company and creditors for allegedly conspiring to defraud creditors out of billions of dollars of property.

“Mr. Edward James has conducted himself with integrity and dignity over decades of hard work. Today, the government issued a long list of accusations, but has not produced a shred of evidence against him,” his lawyer Seth DuCharme said in an emailed statement. “The arrest in Ohio this morning was needless theater. We look forward to appearing in New York on his behalf and we have complete confidence in Mr. James.”

Job Losses

The restructuring advisors who are now running the company told a bankruptcy judge in Houston on Thursday that the fraud was more pervasive and damaging than they initially realized when the company filed its Chapter 11 case in September.

At least 4,000 employees in North America have already lost their jobs because the company has been unable to keep some operations, like its brakes division, operating, bankruptcy lawyer Sunny Singh said today.

Another 13,000 jobs are at risk as the company operates on a week-by-week basis using a $48 million lifeline from automakers who have agreed to pay for parts in advance, according to court documents.

The case is US v James, 26-cr-29, US District Court, Southern District of New York.

Top photo: Autolite spark plugs at an auto parts store in Oklahoma City. Photographer: Nick Oxford/Bloomberg.