First Brands Group’s former CEO Patrick James and his brother Edward were indicted on federal fraud charges and arrested in Ohio on Thursday, the U.S. government said.
The indictment, unsealed by the U.S. Attorney’s Office for the Southern District of New York, alleges that the James brothers carried out a yearslong fraud involving investors and banks. Prosecutors said the brothers used fake documents and false financial reports to obtain billions of dollars for First Brands and millions for themselves.
The government’s filing describes James as the former CEO of the bankrupt auto parts supplier. The indictment also alleges that First Brands’ financing strategy depended on the presentation of inflated financial numbers, including purported accounts receivable, and that the brothers allegedly borrowed against those figures multiple times while concealing the true condition from lenders and investors.
The indictment points to the company’s collapse and its prior bankruptcy filing. When First Brands sought bankruptcy protection in September, officials representing the company said, according to the charging documents, that First Brands had more than $9 billion in debt and only $12 million in cash.
Prosecutors said First Brands changed its name from Crowne Group about five years ago and then expanded by buying and combining several aftermarket auto parts businesses through debt-financed deals. The government said acquisitions under that strategy included brands such as Fram filters, Autolite sparkplugs and Anco windshield wiper blades.
In describing the fraud allegations, prosecutors said the James brothers falsely inflated invoices for accounts receivable and then allegedly borrowed against those numbers two and three times, unbeknownst to lenders and investors. Kareem Carter, an Internal Revenue Service agent, said the indictment alleges the defendants operated First Brands as a “Ponzi” scheme in which “new loan proceeds” were used to pay old lenders and fund an “extravagant lifestyle.”
A spokesperson for James said Patrick James is presumed innocent and denies the charges, and said he built First Brands “from nothing into a global industry leader.” The spokesperson said James looks forward to presenting his case in court.
A lawsuit filed in November against James alleged that he secured billions of dollars in debt financing based in part on fraudulent invoices and then transferred hundreds of millions of dollars to himself and related affiliates to fund what the complaint described as a lavish lifestyle. The lawsuit said the lifestyle included seven homes and 17 cars, and it alleged transfers including $8 million to James’ son-in-law’s wellness company, $2 million for James’ family office, at least $3 million toward rent for a New York City townhouse, and additional sums for items including a personal chef and a “celebrity personal trainer.”
Thursday’s indictment also disclosed a guilty plea by former First Brands executive Andy Brumbergs for his alleged role in the scheme, and prosecutors said Brumbergs is cooperating with the government. Patrick James, 61, and his brother Edward, 60, each face nine counts, including wire fraud, bank fraud and conspiracy to commit money laundering, with most counts carrying a maximum sentence of 30 years if convicted. The former CEO also faces a potential life sentence, and the brothers were scheduled to appear before a judge in Ohio later Thursday, according to the indictment.