[00:00:00] Speaker A: Foreign.
Hi everyone and welcome to this live episode of Ethicast Reacts in which we will look into the E and C implications of the dramatic bankruptcy of aftermarket auto parts manufacturer and brand owner First Brands.
Now first, some background. In late September 2025, First Brands, whose products are sold through chains like Autozone, Walmart and independent Shops.
Its portfolio includes well known names such as Fram, Trico, Rebesto, Centric and others. It filed for voluntary Chapter 11 protection in the U.S. bankruptcy court in the Southern District of Texas. The company disclosed liabilities in the range of roughly 10 to $50 billion against assets of only 1 to $10 billion and cash on hand, maybe in the low tens of millions. An ad hoc group of creditors agreed to provide a little more than $1 billion in debtor in debtor protection, sorry, debtor possession financing so that the company could keep operating, so it could supply customers, so it could basically keep the lights on. Now we're going to put a pin on that because we're going to return to it in just a moment. Now, First Brand's collapse was sudden in market terms, but the underlying issues had been building for years.
First Brands grew through an aggressive debt fueled acquisition strategy in which it rolled up multiple aftermarket brands and loaded its balance sheet with billions of dollars of borrowings. When credit markets tightened and a planned refinancing failed in the middle of this year, the company faced some looming maturities and mounting scrutinies from its lenders and from rating agencies. Where this really became a full blown crisis is that First Brand's heavy reliance on complex receivables, financing and factoring programs.
That's where it all kind of got nutty, because some of these were actually kept off their balance sheet.
Investigations by lenders and journalists pointed to roughly $2 billion of what was called invoice factoring, which led to allegations of double borrowing against the same receivables and ultimately more than $2.3 billion in receivable proceeds that counterparties just said simply vanished into thin air.
Once the confidence in the financial reporting and working capital structures of the company evaporated, the First Brand's access to new funding closed. Chapter 11 became unavoidable. Shortly after the bankruptcy, First Brand's founder and CEO, Patrick James resigned and was promptly sued by the company's new trustees who accused him of extensive fraud and misappropriation of hundreds of millions, perhaps even billions of dollars of company of company money to support a lavish personal lifestyle, one that included mansions, a collection of 17 luxury cars and and spending about half a million dollars on a private chef, as well as funneling money to related parties through questionable invoices and side companies. That $2.3 billion that vanished I talked to you about, that's at the heart of these allegations.
Now, James denies the allegations and has himself called for an independent investigation. US Authorities, including the Department of Justice, have opened probes into the company's dealings with its creditors. The bankruptcy has also rattled parts of Wall Street.
Firms like Jefferies and other institutions had significant exposure through funds that purchased First Brands Receivables. And that has prompted investor concerns about losses and also about systemic risk. Boy, that's a phrase I don't like saying. Again, Erica, about systemic risk from opaque private credit structures, even though Jefferies and others say that their losses have been manageable.
With us to discuss this.
Eric, my stomach is sick over this. Honestly, this whole story has just got me so discombobulated. But I'm so glad you're with us today so we can discuss the lessons that ENC leaders can take from this scenario and how to inform best practices with their own business integrity efforts. Erica, you and I have been following this for a while. We've been looking for a way in which we could discuss it to our ENC cohort here. I'm glad we're discussing it now. Can you talk about why we're talking about this now?
[00:03:59] Speaker B: Yeah. So, Bill, you know, when you and I were first started to follow this particular story, I was surprised by the number of people I have spoken to both inside and outside of at this fear year that weren't following the story at all. Right. That it hadn't shown up in their newsfeed. It hadn't shown up in, in any of the, the, you know, the things that they were, were following. And I think part of the reason for it is there's a lot of this story that is of interest to the people who write about the financial markets. Right. So we first started following the story because we saw it in the ft. Bloomberg's writing about it, the Journal's writing about it. That's where we're finding most of our news about this particular fact pattern.
But at the heart of it, Bill, is things that we as ethics and compliance professionals should be thinking about and talking to the people inside our organizations about. Because what this story is really about is a lack of controls, and it's a lack of controls on a couple of different fronts. Obviously, you've got interrelated family pieces. So the CEO of First Brands privately held organization, the chief Operating officer was either his brother or his brother in law, know, so you have, you know, sort of family relationships inside the business. You have very explosive growth of the organization through pledging of future assets, future future accounts receivables, so complex financing instruments.
And then you have, you know, an element that you and I have talked about a lot over the years, Bill, which is bandwagon effect. And so this, you know, we're not going to look too closely at these things because we are all just making money.
And when you have a situation where and all of us have a version of this that could happen inside our organizations, which is why I want to talk about the story. But when you have a version of this which is, let's not look too closely at the underpinning collateral, you have family relationships inside the organization.
You have incentives to speed due diligence to get loans made quickly. And you have a founder led company with a little bit of a cult of personality happening.
That's a, that's a recipe for significant risk.
And so in those circumstances, you as an ethics and compliance professional have to be on your guard for indications that those kinds of things are happening. So if you have somebody say to you it'll be fine, I've known them for years.
Red flag, right? If you have somebody say to you, well, we have to move fast because there are other parties that are looking at the same asset.
Okay, like I'm all for speed, but speed at the, at the expense of, of, of proper diligence. That's how you wind up in these kinds of situations.
[00:06:53] Speaker A: Yeah, well, something that we had figured out or we had seen during the course of the coverage. And you and I have spent kind of, gosh, good portion of the last week or so on this story alone, honestly.
But one of the most interesting pieces of this was some coverage about how investors, including George Soros, you mentioned red flags. They spotted red flags. Well, at First Brands, well before the company collapsed. And so it wasn't like the red flags weren't able to be seen. There were some people who saw them and they took appropriate action, which just kind of draws down on that bandwagon effect that if the red flags are so visible, people either had blinders on or they simply just proceeded despite the red flag. So can you walk us through a little bit about that? A little bit, you know, a little bit more and the implications, like what implications such early warning systems might have for the future of how this situation could play out even further?
[00:07:40] Speaker B: Yeah, yeah. So Bill, when, when this, when the first brand Story first broke you and I started tracking it and interesting story, interesting fact pattern. But my, my comment to you was we're just going to have to watch this one because we don't have our angle on it. Right. From an Ethicast reacts perspective, there wasn't, there wasn't a thing for us to talk about here other than look how crazy the story is and look how crazy the story is is not really that helpful to the audience that we seek to serve. But then this piece came out in the Financial Times and this was a piece about a couple of lender organizations that had gotten out of First Brands or declined to invest in the first place because of some of the red flags. And those red flags, Bill included things like not allowing a lender to go and investigate the inventory that they were allegedly making the loan against. Right. So, so a refusal on the part of the First Brands team to allow the lender to inspect the collateral that was going to underpin the loan, Massive red flag. Like if you're not gonna let me go, like actually confirm that the inventory is in place or that the accounts receivables are what they say they are and that you haven't double booked your loans against the exact same assets, like why would I write you a check? Right? And so that was the point at which I slacked you and said, okay, we have our angle now because.
[00:09:02] Speaker A: Right.
[00:09:03] Speaker B: It's not like the red flags didn't exist. It's not like other people didn't spot the red flags. And so the question we have to ask ourselves is what happened to the controls inside of the organizations that continue to engage with and loan to the First Brands team that caused them to miss those red flags? And you know, for those of you who out there who are listening to Bill and I and thinking, well, you know, it's totally understandable that they missed those red flags. They were probably just moving too quickly. Some of these people were repeat lenders to First Brands. And so this is where that long standing relationship, oh, it'll be fine, I've known them for years piece comes into play. If you're thinking about risk ranking, either transactions or loans, you know, lending work that you're doing, or vendors that you're engaging with, anywhere where you're, you, you've gotten a, a piece of this where you're responsible for diligence. One of the things that should go into your risk ranking exercise is the tenure of the relationship with the party that you're engaging with.
The longer tenured it is, the more you actually want to look at that particular vendor because the chances are there are things that are happening that are just getting passed by because the relationship is so good. Right. And so that's one of the, the pieces that I wanted to, to pull out of this particular storyline because you know, there, this, that at its heart this is from the lender's perspective, a failure of diligence story. From the first brand's perspective, this is a commingling of assets story. This is a family relationships inside the organization that perhaps led people to think that there were controls that there weren't. Story.
And this, this has elements of, you know, founders feeling like the company's money is their money. And you know, particularly when you're working in a founder led organization, being really cautious about how you as a compliance team make sure that the, that your leader, the founder has separated the company from themselves. Because when we have these kind of commingling cases, right, where you've brought these pieces together, when you have these commingling cases, you really want to, you know, you, you, you want to pull apart this fact pattern and say, you know, what were the things that allowed the, you know, the first brand CEO to think of these funds as their own?
[00:11:28] Speaker A: Yeah, well, speaking of the, of the founder syndrome and of the commingling of funds, that brings me to my next question. And as I mentioned before, you know, First Brands new trustees have accused the founder and former CEO of gross misuse of company resources to fund a lavish lifestyle. And Erica, as you and I have have done on the cash reaction over the course of the year, this is now a common refrain, right? We've seen the story play out a couple times before but, but this one includes perhaps the allegations anyway include moving money from bucket to bucket within the company, both for the purposes of skimming and hiding the skimming. And you know, you talked about, you know, lack of governance and the founder situation. You know, this was all happening really at the highest levels of the organization with a guy who was reported to be intensely private. And one would imagine that's also on a professional level, not just, not just personal, but you know, let's talk about a little bit more in terms of, you know, we would like to take the horror story and then flip it to be best practices. Best practices. Okay. This is obviously a story of coloring well outside the lines if these allegations are true. But what might, what might an organization put into place to really manage this risk? Especially when you have a founder who wants to keep things close, they want the, the books are perhaps intentionally Opaque. These are not, these are no longer red flags, they're actually pennants, they're banners. You know, but let's imagine the ENC person parachuted in this situation.
What, how do you proceed?
[00:12:52] Speaker B: Yeah, I mean this is, you know, this is one of the biggest challenges with, with these, with these types of situations because there is, and we've seen, by the way, Bill, no indication at all that there was a compliance team at First Brands. So no, you know, to the extent like we did our usual diligence and we looked for all of the various pieces that one would look for to indicate that there were any elements of compliance in place of the company and we didn't find any. So, you know, that that's sort of piece number one. The second piece is, you know, look, anytime you've got a founder led organization, there is a, I think an opportunity to look at who are the people who are going to be capable of advising and guiding someone who is that entrepreneurial. And so, you know, was there an advisory board that potentially could have looked at some of what the First Brands team was doing and say, you know, what kind of financial controls have we put in place here? What kind of questions could have come in from the lenders? So you know, again, I think a lot of this, a lot of the responsibility for this sits with some of the very, very large public institutions that lent money to First Brands without, from what we can tell, really meaningful diligence into the securitization of any of the loan making.
And then the third piece is, you know, if I'm an ethics and compliance professional listening to you and I right now, and I work in an organization that is led by the founder, when was the last time I got indications from the founder that they understood their fiduciary responsibilities to the stakeholders of the business? So using a stakeholder conversation to have some of these pieces to be able to say we know this business is not you and you are not this business and what does that look like and how do we kind of keep those governing principles in place? There's gotta be somebody that's capable of having that conversation, you know, with, with the, the CEO. And the question is, how do you find that person?
[00:14:56] Speaker A: Indeed, indeed, Erica. We've gone down this road before, but we're going to go down it again. Do you mind if I ask you a follow up question?
[00:15:03] Speaker B: Not at all, Bill. And especially if that follow up question involves a story that you and I have been watching as well in the financial press that plays into this exact same fact.
[00:15:13] Speaker A: Pattern it 100% does. And if I may be permitted, I'm going to take a moment just to give a quick background of this story as well, which is separate but as we will very quickly see, it's of a piece so federal officials have opened a criminal investigation into and I, I'm going to try very hard to pronounce this correctly. If I get it wrong, that's on me. It's, it's, it's despite my best efforts but federal effort. Federal officials have opened a criminal investigation into Ban Kim Brahmbot, the owner of little known telecom services companies Broadband Telecom and Bridge Voice who was sued by HPS and other lenders earlier this year after they alleged that Brombot's companies owed them more than half a billion dollars and that he fabricated accounts receivable that were supposed to be used as collateral for loans totaling that amount. Very similar situation to what we're seeing here at First Brands.
As I was reading about this, the Journal had a great passage I'm going to quote this is from the Wall Street Journal. Quote, quote the suits center on a kind of debt deal known as asset based finance in which the borrower posts as collateral a stream of revenue generated by specified businesses, equipment or customer receivables. The corner of the debt market. This corner of the debt market has grown significantly along with the rest of the private credit industry. And the Braun bot episode has been one of several recent flashpoints that have raised concerns that credit investors might be exposed to additional losses, end quote. So Erica, my question to you is between this first brand and jitters that there are perhaps more of these situations in the woodwork, it looks like we have a real corporate governance ethics and compliance storm brewing. What are your, what are your thoughts on that?
[00:16:48] Speaker B: Yeah, so you know Bill, I'm glad you brought up the brumbot situation because it allows us to touch on a couple of other pieces that are would be relevant to the audience that, that you and I usually spend our time talking to. So couple of quick points. First off for those of you who are thinking, well yeah, you know, asset based financing, that's fine, I'm not really in it. It's not really going to impact me. This is also how a lot of the AI data center works being financed by the way. And some estimates say that this particular market segment in the US alone is somewhere north of $300 billion worth of, of of lending. So this is a big, big thing. This is also by the way, the famous JP Morgan Chase Jamie Dimond, where you see One cockroach. There are others. Comment came from all of this credit, you know, the private credit lending market stuff. So even Jamie Dimon thinks there are other first brands out there and we should all be be thinking about this and keeping an eye on this.
So the Braunbat situation is a particularly interesting one to me because this one is, is allows us to also talk about the role of ethics and compliance diligence in M and A. So BlackRock bought the underpinning businesses that had lent to Brombot.
And it was post BlackRock acquisition that some of these issues came to light. And so what I presume happened is BlackRock brought their own diligence processes into these newly acquired businesses and some of these issues came to light. Now this is the reason why, by the way, guys, the Justice Department says that ethics and compliance professionals should be involved in the due diligence process in the M and A context before a company is bought so that you can identify potential problems ahead of time. We don't know from the public reporting, Bill, if that was how these issues came to light, but there is that M and A piece as well. So if you are talking to parts of your organization that are thinking about acquiring some of these groups that are exposed to private credit, definitely make sure that you are a part of that M and A conversation and use this.
But either it's Braunbot or First Brands, use both of these fact patterns to talk to your finance teams about whether or not there's potential exposure for you in these kinds of situations. Because at its heart, what this is, is companies that were moving too fast to do proper due diligence that ran into people who were happy to take their money and deal with the consequences later.
And those two things, Bill, plus bandwagon effect, right. When we've got our incentives wrong and our banks are incentivized to lend as quickly as possible without making sure that the underpinning assets are actually sound. That's where we run into bubbles and that's where we run into trouble. So yeah, both of those are things that I take out of this.
[00:19:37] Speaker A: Yeah, I mean, none of this was unavoidable. Like all of this could have been, you know, prevented with just some sound corporate governance, some sound risk management and some sound due diligence. And more than a little bit, as.
[00:19:48] Speaker B: It obviously was, Bill, by both the Apollo Group who had gotten, by the way, who had gotten burned with a private, a prior private credit situation. And so they put additional controls in place and they got themselves out of a first brand situation and A couple of other lenders who looked at it and said, you know what? This is super dodgy. I'm out. And so, you know, it's it. If you have the right controls, you avoid these kinds of situations.
[00:20:15] Speaker A: Yeah, well, when you and I were talking about this, I. I confess to you, this is the first ethicast react story we've done this year where I actually got angry as I was. As I was researching it, just because of the nature of it. It reminds me very much of the financial crisis. There are just a lot of things here. Just the. The preventability of it was just so manifest. It just. It really got me upset. And I remember you were like, just breathe through it. You'll be okay. And so I. So I had to really work to calm myself down. But it does bring up one last question. I do want to throw you away. I know we've gone a little long in this, but this is a big issue and there's a lot to unpack here. You know, when we talk about why organizations should invest in ethics and compliance, we talk about how strong ethics leads to better performance, which it does.
And we talk about how strong ethics manages the risk of misconduct, which it does. But that second part can be kind of a hard sell because a lot of leaders out there say, you know, I'm too smart for that. It'll never happen to me.
[00:21:10] Speaker B: Yeah.
[00:21:10] Speaker A: But as we see time and again, no leaders aren't too smart for that. And yes, it will happen to them. You know, people are just going to people. So my question to you, Erica, is how can ENC leaders break through that magical thinking that sometimes happens at the top levels of organizations that, you know, has this notion that ENC isn't the critical layer of risk management that it really is?
[00:21:35] Speaker B: Yeah.
I mean, Bill, at its heart, that's why you and I are doing at the cast reacts, because we want all of you listening to us to take these stories back to your organizations. Right. We are your eyes and ears, you know, keeping our ear to the ground and finding these kinds of fact patterns that you may or may not be paying attention to. And so take this back to your leadership team and say, where in our organization do we have first brand style behavior? Where in organization, our organization, do we potentially have a brombod? Can we identify those things ahead of time and get out in front of the risk? Because as you said, Bill, people are going to people. And so there's going to be somebody who is going to be tempted to write that loan without doing the proper due Diligence. There's going to be somebody out there who's going to be tempted to onboard that vendor around your process that because your incentives are set up in the wrong way, there's going to be somebody out there who's going to be tempted to say, you know what, I've known this person for 20 years, it's fine. And so how do you use these kinds of stories as the periodic reminders that we all need to make sure that we are keeping our own biases in check? Because that's really what this is about, right? It's about, oh, I've got to get out in front of that other person and grab this loan. Oh, my, you know, I've got X amount of credit that I haven't deployed yet this quarter. I've got to go find a place to deploy it so that it's getting the returns that my stakeholders are requiring. And how do you use these kinds of stories to learn from, to say, no, you know what, I'm not going to, you know, make that particular loan because they won't let me go to the, to the warehouse and look at the collateral. And that's a red flag that my company is going to honor and is going to respect the fact that I didn't move forward with it.
So it goes back to a lot of the stuff that you and I have talked about for years, Bill. It's storytelling. It's using things that have actually happened because they feel like home to us.
And it's asking ourselves, not if it could happen to us, but how would it happen?
[00:23:39] Speaker A: Well, Erica, as always, thank you so much for your insights on this. I have to ask, based on what you've read and learned about this story, what do you suppose the odds are that this won't be the only story of this type that we cover on at the Cast reacts over the next 12 months?
[00:23:52] Speaker B: Yeah, I think the odds of that, unfortunately, Bill, for all of us, are pretty high. I don't think this is the, you know, I'm with Diamond on this one. You never, there's never just one cockroach. When you see a cockroach, there's always a bunch of them in the wall somewhere. And, and you know, I, I, I do think that we are going to see more of this, unfortunately.
[00:24:09] Speaker A: Indeed, indeed, indeed.
Well, on a happier note, for plenty of free ethics and compliance resources on, on due diligence, on corporate governance, on transparency, and much, much more, please visit the Ethisphere resource
[email protected] resources. Thank you so much for joining us, everyone. We really hope you've enjoyed the show. For new episodes each week, please be sure to subscribe to The Ethicast on YouTube, Apple Podcasts and Spotify. And if you don't mind, please share us with a colleague. It really helps us out too. Thank you so much. That's all for now. But until next time, remember, strong ethics is good business. We'll see you soon.
[00:24:44] Speaker B: Bye.
