The alleged frauds that took down First Brands and Tricolor were almost mundane — misstated assets, double-pledged collateral, inflated invoices — yet they ran for years before anyone caught them. Anne Eberhardt, an accountant and certified fraud examiner at Gavin/Solmonese, asks how fraud this unsophisticated still succeeds after nearly a quarter-century of the reforms SOX brought to the US economy.
A year after two auto industry firms collapsed and exposed cracks in private credit, the question lenders are still working through is how frauds this ordinary went undetected for so long.
In September 2025, First Brands and Tricolor filed for bankruptcy, and within a few months, the Justice Department charged both companies’ founders with fraud connected to the losses facing creditors. These were not companies involved in flashy new technologies with speculative valuations, nor were they Ponzi schemes or otherwise criminal enterprises from the very beginning. No, both companies began as legitimate consumer-facing firms in a bread-and-butter business involving different facets of automobile ownership. Both frauds appear shockingly prosaic: misstated liabilities, assets and revenues; falsified collateral; double- and triple-pledged assets, nothing especially creative.
And yet the nagging question is, nearly 25 years after Sarbanes-Oxley, how is fraud on this scale still possible?
Founded in 2007, Tricolor sold and financed used automobiles, primarily to underserved immigrant communities with subprime credit profiles. The criminal indictment against the founder and his COO alleges that, beginning in 2018, the two of them engaged in schemes to “…fraudulently double-pledge collateral to multiple lenders and manipulate the characteristics of collateral to make ineligible, near-worthless assets appear to meet lender requirements.”
From its inception in 2013, First Brands embarked on an aggressive acquisition strategy, building a portfolio of auto parts manufacturers financed by debt. The criminal indictment against the two brothers who founded the company alleges that they obtained billions of dollars in financing by fraudulently inflating invoices for accounts receivable and accounts payable, falsifying financial payments and hiding substantial liabilities from lenders.
Both companies found themselves in the crosshairs of evolving markets and macroeconomic trends, including reduced customer bases, lengthening conversion cycles, rising interest rates, a maturing credit cycle and evolving trade rules. The frauds alleged by prosecutors unfolded against that backdrop, but the indictments describe conduct that began years before the companies collapsed.
What’s striking about both Tricolor and First Brands was how long the alleged frauds went on before they were uncovered and how quickly both companies unraveled once they were discovered.
In the case of Tricolor, a junior analyst noticed, in a spreadsheet he was reviewing, that principal was not being reduced in the underlying loans of a covered portfolio. And First Brands was unable to complete a refinancing when lenders began to question reported earnings and management provided unsatisfying and troubling answers.
5 warning signs to learn from
One of thcoe recurring themes is the way complacency can give way to disaster. As former Defense Secretary Donald Rumsfeld famously warned us, the most difficult problem to solve is “unknown unknowns.” Nevertheless, these two major bankruptcy cases offer clear lessons.
1. Corporate governance is a credit risk indicator
With both First Brands and Tricolor, the lack of adequate corporate governance structures contributed to the opportunity for fraud. An evaluation of formal corporate governance structures should be a critical part of underwriting due diligence and ongoing evaluations. Companies must be able to demonstrate a clear segregation of duties within senior management structures, with board supervision and independent audit committees.
2. Cash flow tells the truth before earnings do
First Brands used adjusted EBITDA to mask much of its concealed leverage, while Tricolor fabricated evidence that non-performing loans were performing, according to government officials. Ultimately, expected cash inflows could not be reconciled to the reported performance. Cash inflows should be independently verified from bank records, which should be reconciled to cash flows implied by the debtor’s records. Cash does not lie.
3. Complexity is a risk factor, not a sign of sophistication
Complex capital structures, special-purpose vehicles (SPVs), off-book factoring arrangements and self-serviced securitization pools contributed to the ambiguity that prevent early detection of fraudulent activities. Analysts should insist on coherent explanations of complex capital structures, including the existence and purpose of SPVs. Collateral flows should be easily mapped and independently verified, along with independent field examinations, as required.
4. Management reporting should be treated with healthy skepticism
Lenders grew suspicious of Tricolor’s finances following unusual delays in completing the audits and the discovery of anomalous loan amortization schedules, according to reports. When First Brands pushed back on providing a credit fund access to their data rooms, investors considered that “an instant red flag,” a report said. Compliance professionals and analysts must recognize the limits of risk-monitoring tools. Software reporting is only as good as its programming and built-in constraints. Protocols that were built under one set of assumptions may become wholly inadequate in a rapidly changing environment. It is also sobering to realize that reporting systems often produce results that are simply incorrect. Ongoing independent testing of modeling assumptions and calibration of results should be standard operating procedure.
5. Monitoring doesn’t stop at closing
Lenders should never treat monitoring as a passive checklist exercise once credit facilities are funded. At both Tricolor and First Brands, assets that were reportedly double- and even triple-pledged were not discovered until the companies were in bankruptcy. Lenders must protect themselves by performing routine and ongoing verification of collateral from filed UCC reports. As most lenders are covered by the nation’s anti-money laundering laws and the accompanying Know Your Customer (KYC) requirements, it is a virtual certainty that institutions that fail to monitor bankruptcy-bound customers will find themselves as defendants in the inevitable litigation actions filed during bankruptcy proceedings.
Not the end
The lessons provided by these headline-grabbing fraud allegations are still being sorted out. Additional protocols will almost certainly be added to the due diligence process to protect from catastrophic losses, regulatory scrutiny and bankruptcy litigation. Due diligence costs will likely increase, and lenders will be far less willing to accept client-provided schedules and data on blind faith. Perhaps new tools using AI will become standard for verifying customer-provided data.
Will this mean the end of fraud? Of course not. Fraud, it seems, will always be with us. But combating fraud is not about predicting every bad actor. It is about building resilient underwriting and monitoring frameworks to identify red flags early enough to mitigate exposure.
As new technologies and regulatory requirements emerge, the imagination and creativity of fraudsters will also continue to evolve. It will be up to compliance professionals to resist complacency and remain vigilant and creative as they anticipate the next round of unknown unknowns.
The alleged frauds that took down First Brands and Tricolor were almost mundane — misstated assets, double-pledged collateral, inflated invoices — yet they ran for years before anyone caught them. Anne Eberhardt, an accountant and certified fraud examiner at Gavin/Solmonese, asks how fraud this unsophisticated still succeeds after nearly a quarter-century of the reforms SOX brought to the US economy.
A year after two auto industry firms collapsed and exposed cracks in private credit, the question lenders are still working through is how frauds this ordinary went undetected for so long.
In September 2025, First Brands and Tricolor filed for bankruptcy, and within a few months, the Justice Department charged both companies’ founders with fraud connected to the losses facing creditors. These were not companies involved in flashy new technologies with speculative valuations, nor were they Ponzi schemes or otherwise criminal enterprises from the very beginning. No, both companies began as legitimate consumer-facing firms in a bread-and-butter business involving different facets of automobile ownership. Both frauds appear shockingly prosaic: misstated liabilities, assets and revenues; falsified collateral; double- and triple-pledged assets, nothing especially creative.
And yet the nagging question is, nearly 25 years after Sarbanes-Oxley, how is fraud on this scale still possible?
Founded in 2007, Tricolor sold and financed used automobiles, primarily to underserved immigrant communities with subprime credit profiles. The criminal indictment against the founder and his COO alleges that, beginning in 2018, the two of them engaged in schemes to “…fraudulently double-pledge collateral to multiple lenders and manipulate the characteristics of collateral to make ineligible, near-worthless assets appear to meet lender requirements.”
From its inception in 2013, First Brands embarked on an aggressive acquisition strategy, building a portfolio of auto parts manufacturers financed by debt. The criminal indictment against the two brothers who founded the company alleges that they obtained billions of dollars in financing by fraudulently inflating invoices for accounts receivable and accounts payable, falsifying financial payments and hiding substantial liabilities from lenders.
Both companies found themselves in the crosshairs of evolving markets and macroeconomic trends, including reduced customer bases, lengthening conversion cycles, rising interest rates, a maturing credit cycle and evolving trade rules. The frauds alleged by prosecutors unfolded against that backdrop, but the indictments describe conduct that began years before the companies collapsed.
What’s striking about both Tricolor and First Brands was how long the alleged frauds went on before they were uncovered and how quickly both companies unraveled once they were discovered.
In the case of Tricolor, a junior analyst noticed, in a spreadsheet he was reviewing, that principal was not being reduced in the underlying loans of a covered portfolio. And First Brands was unable to complete a refinancing when lenders began to question reported earnings and management provided unsatisfying and troubling answers.
5 warning signs to learn from
One of thcoe recurring themes is the way complacency can give way to disaster. As former Defense Secretary Donald Rumsfeld famously warned us, the most difficult problem to solve is “unknown unknowns.” Nevertheless, these two major bankruptcy cases offer clear lessons.
1. Corporate governance is a credit risk indicator
With both First Brands and Tricolor, the lack of adequate corporate governance structures contributed to the opportunity for fraud. An evaluation of formal corporate governance structures should be a critical part of underwriting due diligence and ongoing evaluations. Companies must be able to demonstrate a clear segregation of duties within senior management structures, with board supervision and independent audit committees.
2. Cash flow tells the truth before earnings do
First Brands used adjusted EBITDA to mask much of its concealed leverage, while Tricolor fabricated evidence that non-performing loans were performing, according to government officials. Ultimately, expected cash inflows could not be reconciled to the reported performance. Cash inflows should be independently verified from bank records, which should be reconciled to cash flows implied by the debtor’s records. Cash does not lie.
3. Complexity is a risk factor, not a sign of sophistication
Complex capital structures, special-purpose vehicles (SPVs), off-book factoring arrangements and self-serviced securitization pools contributed to the ambiguity that prevent early detection of fraudulent activities. Analysts should insist on coherent explanations of complex capital structures, including the existence and purpose of SPVs. Collateral flows should be easily mapped and independently verified, along with independent field examinations, as required.
4. Management reporting should be treated with healthy skepticism
Lenders grew suspicious of Tricolor’s finances following unusual delays in completing the audits and the discovery of anomalous loan amortization schedules, according to reports. When First Brands pushed back on providing a credit fund access to their data rooms, investors considered that “an instant red flag,” a report said. Compliance professionals and analysts must recognize the limits of risk-monitoring tools. Software reporting is only as good as its programming and built-in constraints. Protocols that were built under one set of assumptions may become wholly inadequate in a rapidly changing environment. It is also sobering to realize that reporting systems often produce results that are simply incorrect. Ongoing independent testing of modeling assumptions and calibration of results should be standard operating procedure.
5. Monitoring doesn’t stop at closing
Lenders should never treat monitoring as a passive checklist exercise once credit facilities are funded. At both Tricolor and First Brands, assets that were reportedly double- and even triple-pledged were not discovered until the companies were in bankruptcy. Lenders must protect themselves by performing routine and ongoing verification of collateral from filed UCC reports. As most lenders are covered by the nation’s anti-money laundering laws and the accompanying Know Your Customer (KYC) requirements, it is a virtual certainty that institutions that fail to monitor bankruptcy-bound customers will find themselves as defendants in the inevitable litigation actions filed during bankruptcy proceedings.
Not the end
The lessons provided by these headline-grabbing fraud allegations are still being sorted out. Additional protocols will almost certainly be added to the due diligence process to protect from catastrophic losses, regulatory scrutiny and bankruptcy litigation. Due diligence costs will likely increase, and lenders will be far less willing to accept client-provided schedules and data on blind faith. Perhaps new tools using AI will become standard for verifying customer-provided data.
Will this mean the end of fraud? Of course not. Fraud, it seems, will always be with us. But combating fraud is not about predicting every bad actor. It is about building resilient underwriting and monitoring frameworks to identify red flags early enough to mitigate exposure.
As new technologies and regulatory requirements emerge, the imagination and creativity of fraudsters will also continue to evolve. It will be up to compliance professionals to resist complacency and remain vigilant and creative as they anticipate the next round of unknown unknowns.
