First Brands founder resigns amid accounting scandal and billions in missing funds

Key Points

• First Brands founder Patrick James resigned amid an accounting scandal and a bankruptcy filing, leaving lenders searching for $2 billion in missing funds.
• The company filed for bankruptcy with debts estimated between $10 billion and $50 billion while holding less than $10 billion in assets.
• Jefferies Financial Group experienced a significant drop in share value due to its $715 million exposure to First Brands, but reassured investors about its overall financial stability.
• There are concerns regarding potential double-borrowing practices by First Brands, prompting Raistone Capital to request an independent examination of the company's finances.

The founder and CEO of First Brands resigned Monday, weeks after the auto parts supplier filed for bankruptcy protection amid an accounting scandal that has left lenders scrambling for more than $2 billion in missing funds.

Patrick James, who founded the company in 2013, will be replaced on an interim basis by Charles Moore, who was appointed as chief restructuring officer last month to sort out the company's financial and potential legal troubles and prepare it for a possible sale.

After changing its name to First Brands from Crowne Group about five years ago, the Cleveland company began buying and then cobbling together a number of aftermarket auto parts manufacturers through debt-financed deals. Acquisitions by First Brands included well-known industry brands like Fram filters, Autolite sparkplugs and Anco windshield wiper blades.

Yet the company collapsed late last month and according to filings with a bankruptcy court, First Brands had between $10 billion and $50 billion in debt and less than $10 billion in assets.

The amount of money that is owed spread fear on Wall Street about lenders that helped finance First Brands' spending spree, and shares of some of those financial firms tanked over the past week.

Jefferies Financial Group, whose shares lost nearly a quarter of their value since the Sept. 29 bankruptcy filing, downplayed its exposure to the collapse late Sunday.

Jefferies lent funds to the auto parts company through investment manager Point Bonita. Point Bonita would collect on invoices, or accounts receivable, from retail customers of First Brands, including Walmart, AutoZone and Napa. Jefferies said that Point Bonita was owed $715 million in its “factoring” deal with First Brands.

There is speculation that First Brands may have been double-borrowing against its invoices off its books. Jefferies said that First Brands stopped relaying payments to Point Bonita on Sept. 15.

In an open letter on Sunday, Jefferies CEO Rich Handler and President Brian Friedman said the financial services company's investments in Point Bonita's receivables purchased from First Brands amounted to $43 million.

“We are confident that any losses or expenses from these investments or otherwise in respect of First Brands can readily be absorbed and do not threaten our financial condition or business momentum,” they wrote.

They said the sell-off in Jefferies shares was an overreaction.

Yet the implosion at First Brands had sown distrust among other lenders of how the bankruptcy will play out.

“It’s not here. We don’t have it,” attorneys for First Brands told the bankruptcy court, referring to cash that was supposed to go to lenders. “There’s $12 million in the bank account today. There is nothing else.”

Raistone Capital filed an emergency motion last week requesting the appointment of an independent examiner, saying that First Brands-appointed “independent” directors were insufficient considering the amount of money — as much as $2.3 billion — that had “simply vanished.”

Earlier this month, First Brands got approval from a U.S. bankruptcy court to immediately access $500 million out of the $1.1 billion in debtor-in-possession financing to maintain operations, make payroll and pay vendors and suppliers.

First Brands' next bankruptcy hearing is scheduled for Oct. 29.