Missing Billions and a Secretive CEO: The First Brands Bankruptcy

0:05First Brands is an automotive company you've probably never heard of. But you've almost certainly relied on some of the things it makes. And many of them are products that are probably in vehicles that you've ridden in. So there's the Fram filters, there's Trico windshield wipers, there's spark plugs, all sorts of stuff like this. That's our colleague Alexander Gladstone. He says that First Brands, this once-obscure company, has been getting a lot of attention lately. Because late last month, First Brands filed for bankruptcy. American auto parts maker, first brands, filing for Chapter 11 bankruptcy protection.

0:43And as forensic accountants pieced through the tangled wreckage, they discovered that the company contained a lot of surprises. So when they filed, it was kind of like, whoa, this is a hot mess, to be honest with you. They have found over$11 billion, almost$12 billion of debt. And so, you know, there's a lot of people who could potentially lose a lot of money.

1:11What stands out about this bankruptcy is its scale, the extensive allegations of fraud or inappropriate activity, and the enormous amount of money that the company owes to people. People are definitely worried. I think a lot of folks are worried about it. It's the latest and biggest business scandal to hit Wall Street. And so I think that it's very concerning to a lot of people.

1:38Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Monday, October 27th.

1:51Coming up on the show, why a car parts bankruptcy is rattling Wall Street.

2:09At the center of First Brand's breakdown is the company's CEO, Patrick James. Patrick James is from Malaysia, Kuala Lumpur, I believe, is his hometown. And he came to the United States in the 1980s to attend the College of Worcester, a college in the Cleveland area of Ohio. And he's basically stayed in the Cleveland area ever since. That's his main sort of power base or the area where he built his empire. From a modest beginning, James spent years building up a vast business empire in the early 2000s. He took an aggressive approach to growth, buying up brand after brand in multi-million dollar deals.

2:49Brands like Autolite Sparkplugs. Remember, from bumper to taillight, you're always right with Autolite. And Fram oil filters. Fram, you could pay a little now or a lot later. In total, First Brands ended up with 25 different brands under its hood. By 2024, the company was taking in$5 billion in sales. So it's like an incredibly complex corporate matrix of dozens of different subsidiaries and affiliates all over the world. So factories, warehouses, distribution centers. It was a really big, expansive company. Patrick James is an intensely private person, according to former employees and business associates.

3:36He's gone to great lengths to avoid being photographed and has scrubbed himself from the internet. Some first brand executives said they rarely saw their boss at the company's headquarters in Cleveland. His orders came through via email or via a collection of close confidants. But despite his secretive presence, Once, James held a tight grip on the company. 100 % of the equity is owned by Patrick James. There are no other shareholders. Which means there's not as much scrutiny, there's not as much disclosure over what the company is doing. Yes, it's different. Well, here's the thing. They do have to provide regular financials.

4:16But the disclosure obligations for a private company like this are much less than what you have for a publicly listed company. But by September, a bright light was about to shine on First Brand's opaque finances when the company filed for bankruptcy. So it was kind of like a shocking moment where it's like people knew something, you know, there was smoke in the air with First Brands, but they didn't know the extent of it. As it turned out, First Brands was on very shaky financial footing. Forensic accountants discovered that the company was drowning in debt, nearly$12 billion of debt, almost half of which was not previously listed on the company's balance sheet.

4:59When they filed and the restructuring professionals showed what they found in the recent weeks they'd been investigating, it was like pretty eye-popping. Wow, there's a lot of money missing. There's all these billions. $12 billion is an incredible amount of debt. How did the number get so big? What happened is that over time, the financing got more and more elaborate. They were making about an acquisition every single year. So every year, on average, they're making a major acquisition. To finance that, they were using all sorts of different debt. There's corporate debt. Then they had debt that was collateralized by inventory and property and equipment, stuff like that.

5:44Then they had this other form of debt, which is known as factoring. Factoring. It's a type of debt that makes a lot of sense in an industry like auto parts. One thing you have to understand about this industry is that products sit on the shelf for a long time. So the way it works is that first brands would provide products to AutoZone and Walmart and O 'Reilly's without any cash up front. So they get sort of an IOU. They then take that IOU and go to a bank or another financing institution and say, you know, this is an IOU for the windshield wipers that we've supplied. Why don't you give me cash right now?

6:22And when the customer ends up paying, I'll give that to you. What's the benefit of a system like this in theory? The benefit is that first brands gets paid cash on a quick timeframe. And then the financing parties, the banks and other institutions, they make some money on it by providing the money, you know, up front and then getting paid a little bit more later on. Okay, so this sounds like a relatively normal thing to do. So where does it start to go wrong for first brands? Now, we don't know exactly what happened and they're still, you know, investigating this. But what seems to have happened is the company began getting over its skis and allegedly cutting corners as they got more and more indebted.

7:13According to court filings, instead of promising one IOU to one lender, First Brands appear to be double-dipping, promising that same IOU to other lenders, too. The bankruptcy has also revealed that there was a big problem with First Brands' other debt. Billions of dollars of loans were not on the company's balance sheet. The reason is because first brands set up other entities to acquire loans, according to court filings. What they can do is they create special subsidiaries that then are not part of the company, but then they will own certain assets and so forth. And so these can then issue debt that's backed by those assets, but it's not part of the main company.

7:57As forensic accounts combed through First Brand's subsidiaries, they found some irregularities. According to court filings, some assets are now missing, meaning that certain loans might not be backed up with any collateral at all. Heading into this year, the complexity of First Brand's finances amounted to a delicate house of cards, which was holding up. Until it didn't. There was a few things that sort of set the gears into motion for what happened later, which is, one is that when the tariffs hit, when the Trump administration implemented this new round of tariffs, that put pressure on the automotive sector writ large because they sourced a lot of their products from abroad.

8:41They had a lot of operations abroad. So I think that sort of squeezed them on the margins. As its costs went up, first brands tried to dig itself out of the hole. But that only made things worse. That's next.

9:05After the tariffs hit, First Brands needed help. So the company turned to an investment giant called Jefferies Financial. Jefferies had a long working relationship with First Brands, advising the company on loans and other financial matters since 2014. So Jeffries was the lead investment banker for the company. Jeffries' job is to go out and communicate with investment funds and say, we'd like you to buy a piece of this new loan. We think it's going to be a good deal. Okay, they're representing the company as their banker. In 2019, Jeffries became more deeply entwined with first brands when it started putting some of its own money on the line, along with money from its clients.

9:50Jeffries operates a number of different funds. One of those funds was investing in what I described earlier as the factoring. So he was buying unpaid invoices and then collecting on them later. So understand that Jeffries was wearing two hats. They were both providing financing, supply chain financing or factoring financing, as we've discussed. And they were also the company's investment banker. Jeffries says that its banking side and its investing operation are kept separate and do not share any information with each other. Through its investment arm, Jeffries steered$715 million into First Brands.

10:33$45 million of that came from Jeffries, and the rest came from institutional investors, including BlackRock and Morgan Stanley. First Brands made payments to Jeffries' investment fund almost daily, for years, as customers paid their invoices.

10:52This summer, Jeffries tried to help First Brands by leading an effort to refinance$6 billion of the company's corporate loans. To do that, Jeffries sought out investors to take on some of its debt. They went out to the market saying, we want people to participate in this and buy these new$6 billion of loans. And in the deck that Jeffries presented, like the company's own disclosures, It only listed the$6 billion of corporate loans. It didn't mention the billions of dollars of off-balance sheet debt or the factoring debt. Jeffries' pitch deck to investors was based on First Brand's 2024 financial statements.

11:33The presentation included a page that noted 71 % of First Brand's sales were factored, though Jeffries told investors that it didn't affect the company's creditworthiness. But before investors would commit to helping First Brand's refinance, they demanded to know more about the company's financials. First Brands said it would provide that information, but in mid-September, before it could share it, the company stopped making the nearly daily payments it had been making to the Jeffries Investment Fund. Soon after, Jeffries halted its effort to refinance the company's debt. And by the end of September, First Brands declared bankruptcy.

12:11And it's left the company in pieces.

12:17James has stepped down as CEO and, through a lawyer, denied wrongdoing. A spokesman said, quote, Patrick James has always put the interests of First Brands Group ahead of his own. The Department of Justice has also opened a criminal investigation into First Brands. In the wake of First Brands' collapse, Jeffrey's stock has also taken a nosedive. Investors worry that the bank might never recover the money it steered into First Brands. But they also have broader concerns. given that they were the company's investment banker and they were the lead investment banker, some folks are questioning their judgment and asking, well, could Jeffries have done better due diligence about all these different corporate affiliates and all this out-balanced fee debt?

13:02Could that have been found out? Maybe, maybe not. We don't know because the reality is that a lot of people were not aware of the company's financial condition. So it isn't like Jeffries is alone in that, but some would say that just given Jeffries' lead role in things, it had an extra responsibility to do due diligence. Leaders at Jeffries have tried to reassure investors. Earlier this month, CEO Rich Handler and President Brian Friedman issued a statement saying the bank was fundamentally sound and called the reaction to the bankruptcy, quote, meaningfully overdone. At a later investor day, Handler said, quote, We believe we were defrauded.

13:44This seems like an issue for Jeffries and the other banks that loan First Brands money, but is there a bigger threat to Wall Street at large? You know, it's hard to say. It's really hard to say that whether this is sort of a really one-off unique situation that's just contained to First Brands, or is it the canary in the coal mine for larger problems? You know, could there be other First Brands out there, essentially? Is there going to be tighter financing terms for suppliers that could cause supply chain bottlenecks? Is it going to be harder to get the kind of financing I've described, this factoring, which would make it more difficult to do business in some ways?

14:26We don't know, and we're looking into it. What's your takeaway from this story? You know, the way I look at it is the issue with first brands is that people were underwriting a company without really examining who it was and what was really going on here. And the takeaway to me is that you need to really know who you're doing business with. It's not enough to think, okay, well, I'm investing in these financial products. They're backed by a certain kind of collateral. Well, looks good to me. It's money good. And so I think that people might have been better off if they'd taken a closer look and just tried to assess or learn more about who they were doing business with.

15:19This episode has been updated to better reflect the size of First Brand's debt not on their balance sheet. It's in the billions rather than millions.

15:31That's all for today. Monday, October 27th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by John Keilman, Jody Hsu Klein, and Lauren Thomas. Thanks for listening. See you tomorrow.