First Brands Group founder Patrick James and his brother, former executive Edward James, have been indicted in New York following the bankruptcy of the auto-parts maker last year. The federal indictment alleges the brothers orchestrated a series of schemes to defraud the company's lenders and financing partners, including faking and inflating invoices for accounts receivable, double- and triple-pledging loan collateral, falsifying financial statements, and concealing liabilities from lenders.

Patrick, 61, and Edward, 60, were arrested in Ohio and are facing nine counts each, which include continuing financial crimes enterprise, wire fraud, bank fraud, conspiracy to commit wire fraud, and conspiracy to commit money laundering. The most severe charge, operating a continuing financial crimes enterprise, carries a maximum sentence of life in prison.

US Attorney Jay Clayton of the Southern District of New York stated that the James brothers "perpetrated a staggering fraud at First Brands Group," obtaining billions for the company and millions for themselves by presenting the illusion of a successful, growing international business. In reality, Clayton asserted, First Brands operated "through fraud, fake documents, and false financials." A former company executive, Peter Brumbergs, has pleaded guilty to his involvement in the scheme and is cooperating with prosecutors.

The alleged schemes have left First Brands' lenders facing billions in losses. The company filed for Chapter 11 bankruptcy with only $12 million in its corporate accounts against more than $9 billion in liabilities. The indictment details complex financial maneuvers, such as using false invoices and deceiving financers into sending money to a bill-processing intermediary. Lenders believed these funds would pay First Brands' suppliers, but the money was allegedly routed back to the company itself in what prosecutors termed "round trip" funds. These funds were then used to cover interest on debt, rent, leases, and other operating costs, rather than paying suppliers. Prosecutors also describe repeated deceptions to senior lenders regarding the company's off-balance sheet debt, even as "the James entities incurred billions of dollars in inventory-backed obligations using First Brands’ inventory."

Patrick James has denied the charges through a spokesman, stating his innocence and his devotion to building First Brands into a global industry leader. He has previously attributed the company's financial troubles to macroeconomic factors and accused lenders of engaging in "predatory" practices. Edward James's lawyer, Seth DuCharme, also denied the accusations, claiming the government has not produced any evidence against his client. Both brothers resigned from their positions shortly after First Brands filed for Chapter 11, with Edward James later facing lawsuits from the company and creditors for allegedly conspiring to defraud them.

The impact of the alleged fraud has been severe, particularly for employees. Restructuring advisors managing the company informed a bankruptcy judge in Houston that the fraud was more extensive and damaging than initially understood. At least 4,000 employees in North America have already lost their jobs, with another 13,000 positions at risk. The company is currently operating on a week-to-week basis, sustained by a $48 million lifeline from automakers who have agreed to pay for parts in advance.