US-based car parts manufacturer First Brands Group has filed for bankruptcy protection amid explosive claims of widespread fraud, prompting the launch of an independent criminal probe into the disappearance of £1.84 billion ($2.3 billion) in company funds.
The firm, a major player in aftermarket auto components such as brakes, filters, and lighting systems, sought Chapter 11 protection in a Texas court last September. It cited crippling debts estimated between £8 billion ($10 billion) and £40 billion ($50 billion) against assets of just £800 million ($1 billion) to £8 billion ($10 billion).
The filing exposed a web of alleged financial misconduct, centred on dubious third-party financing arrangements for customer invoices. Investigators believe these arrangements masked the siphoning of vast sums over several years.
Court-appointed examiner Martin De Luca, a seasoned litigator from Boies Schiller Flexner with a track record in high-profile disputes, has been tasked with unravelling the scandal. Armed with a £5.6 million ($7 million) budget, De Luca’s investigation targets accusations that former chief executive Patrick James orchestrated the looting.
The investigation focuses on claims that James inflated company values through debt-fuelled acquisitions while diverting funds. Sources close to the case suggest the shortfall stems from double-financed receivables and inventory, where assets were pledged multiple times to lenders, creating phantom collateral that evaporated upon scrutiny.
The probe gained urgency this month as First Brands warned of imminent cash depletion. Reserves have dwindled to around £152 million ($190 million) after an initial £880 million ($1.1 billion) borrowing to sustain operations. Company lawyer Sunny Singh told the court the firm could shutter by month’s end without fresh funding.
In response, First Brands has accelerated a sale process for its entire business or in segments, aiming to finalise deals by March under bankruptcy rules. Potential buyers, including rival aftermarket giants, are circling, drawn by the firm’s strong brand portfolio despite the turmoil.
Tensions have escalated among creditors, with lenders clashing over claims for inventory financing. Evolution Credit Partners alleges First Brands submitted falsified borrowing certificates, overstating asset purchases by £88 million ($110 million).
Meanwhile, payment chaos has gripped customers. Many are withholding funds amid uncertainty over invoice validity, exacerbating a monthly cash burn of £80 million ($100 million) against meagre operational inflows.
The scandal has spotlighted vulnerabilities in opaque private credit markets, where Wall Street heavyweights backed First Brands’ aggressive expansion. Bankruptcy judge Christopher Lopez, overseeing the Houston proceedings, has quashed overlapping creditor enquiries to streamline De Luca’s work, emphasising the need for a swift, impartial reckoning.
If fraud is substantiated, criminal charges could follow, potentially ensnaring James and accomplices. For now, the firm clings to survival, negotiating emergency loans from an ad hoc lender group while probing deeper into the financial black hole.
Industry watchers warn this could signal broader cracks in leveraged buyout models, urging tighter oversight. As De Luca digs in, the automotive sector holds its breath, awaiting revelations that could reshape corporate accountability.