Money Stuff: First Brands Found Some Fake Invoices

If you are a company that makes brake parts, you will have some website or other system where car dealers and auto-parts stores and other customers can order the brake parts that they need. A car dealership will go on your system and order $179.84 worth of brake parts, and you will send them the brake parts. Customarily you will send them the brake parts on credit: They might have 30 or 60 or 90 days to pay you the $179.84.

But you might want the money sooner, since after all you have already sent them the brake parts. So you can “factor” the invoice: You go to some lender (a bank or specialist factoring firm), the lender gives you, say, $177, and when the customer ultimately pays the $179.84, it goes to the factoring firm. [1] The difference between the $179.84 that the customer pays and the $177 that the lender gives you is the lender’s interest.

How does this loan get negotiated? You could imagine calling around to a couple of banks and asking them to evaluate the loan. They could do some credit work, asking questions about the maturity of the invoice and your customer’s creditworthiness and payment history. They could work up a model and quote you a rate on the loan. Then you would take the best rate, negotiate definitive documentation, sign an agreement and get the money. But it’s $179.84. You sell $179.84 worth of brake parts many times a day, to many different customers. You’re not going to factor each invoice separately.

What you are going to do is negotiate a few general agreements with a few big lenders, who will do some general due diligence on you and your customers and will have general terms for what sorts of invoices they will accept. And then every day you will do like a thousand transactions like this, and periodically you will bundle up a few thousand transactions and send your lender … a list. You will send the lender a big spreadsheet that is like “here are the 10,000 invoices we got last week, they add up to $2 million,” and your lender will glance through the list and say “sure” and send you back $1.97 million.

The lender is fundamentally lending against the list. The lender’s collateral is the list. If things go wrong, the lender will look to the list for payment. It will call up the car dealership that got $179.84 worth of brake parts and say “hey you owe me that $179.84 now, you’re on my list.” There will probably be enough documentation that the car dealership will actually pay the lender the $179.84. [2] The system all sort of works.

I want to say that this is magical? The economy is lubricated — you get your money fast and the car dealership keeps its money longer — by a system of legal rights and deep social trust; you can send a lender a list of numbers and get back actual money. A world in which nobody trusted anyone and everyone had to do due diligence on every $179.84 invoice would be a world in which it was hard to sell $179.84 of brake parts on credit, and one in which fewer brake parts got sold. This loose, high-trust system makes everyone better off.

But, you know. I wrote the other day that “if you have a thriving financial system in which people lend hundreds of millions of dollars of real money secured by forwarded emails, you are going to end up lending some money against some fake emails.” What is to stop you from deleting the $179.84 on the list and replacing it with some other, higher number, say $9,271.25, to get the lender to send you an extra $9,000? The answer is not “nothing”! Lots of things might stop you:

1. Most people are basically decent, and this is fraud and you shouldn’t do it.
2. If you’re caught you might go to prison.
3. Your lenders are not going to do careful due diligence on every single invoice, but there is some risk of them doing some checking and noticing a fake one, and the more of this you do the greater that risk.
4. You still have to pay back the extra $9,000 that you borrowed, even though there is no underlying receivable. (If you don’t, you’ll get caught pretty quickly.) If you’re borrowing the extra $9,000 to invest in a productive business, then … ehh this has probably happened! But you’re not, are you? You’re borrowing the extra $9,000 to spend on your own lifestyle, and when the invoice is due you will have to come up with an extra $9,000, and how are you going to do that? I’ll tell you how: You’re going to fake another invoice, this one for $29,000, and use $9,000 of that to pay back the previous loan and $20,000 on your continually expanding lifestyle. And then you’re going to do it again in two months, for even more money. And this will snowball until you are inevitably caught.

All good reasons not to write fake numbers in the list that you send to a lender to get back money! But none of them are absolute barriers to doing it. Will someone, sometime, write some fake numbers on a list to get back more money? Of course. “The optimal amount of fraud is not zero,” and this efficient high-trust system is going to enable some fraud.

We have talked a few times about First Brands Group, a car-parts company that went bankrupt in September. First Brands had all sorts of financing arrangements, including a lot of factoring of receivables, and there have been rumors that it might have been doing some double-pledging of assets to finance itself. And now:

First Brands Group sued founder Patrick James for allegedly misappropriating hundreds of millions of dollars from the US automotive supplier that collapsed into bankruptcy in September.

Lawyers for the company — now run by restructuring consultants at Alvarez & Marsal — alleged that James borrowed funds on fraudulent terms, only to “routinely and regularly” divert cash for himself and his family, according to a Southern District of Texas filing dated Nov. 3. More than $700 million was funneled from First Brands directly to James and his affiliated entities from 2018 to 2025, they claimed.

James “secretly pilfered some of the Company’s assets to fund his and his family’s lavish lifestyle. In short, he lined his pockets at the expense of First Brands and its creditors,” according to the document. …

James’ spokesperson said the company founder “categorically denies the baseless and speculative allegations contained in the First Brands complaint” and said he intends to immediately challenge the suit.

Here is the complaint. There are two conceptually distinct problems here. One is that James allegedly “secretly pilfered” a lot of money from First Brands to fund his lifestyle without really accounting for where the money went. “Mr. James has never provided a comprehensive accounting of the amounts or purposes of all of the transfers made between and among First Brands and Mr. James and his affiliated entities,” and “the Company’s advisors are unaware of any formal documentation indicating that these payments constituted dividends or distributions in the ordinary course.”

I am somewhat sympathetic here: James was the 100% equity owner of First Brands, so in some loose sense First Brands’ money really was his money. Not entirely: James owned all of the equity, but First Brands was very levered and is now bankrupt, so in some more practical sense First Brands’ money really was its creditors’ money. If you are the sole owner of a company, and the company borrows a lot of money, and you take that money out of the company and use it for your own lifestyle, and then it goes bankrupt, you really should expect that you’ll have to pay the money back to the company’s creditors. The legal theory here is generally called “fraudulent transfer,” but it doesn’t require any actual fraud. 

But sometimes there’s fraud too. The other, conceptually distinct but practically related problem is that First Brands allegedly did some faking of invoices. [3] The problems are practically related because, when First Brands borrowed against its actual invoices, it kind of needed that money to run its business. It didn’t have hundreds of millions of extra dollars lying around to fund James’s lifestyle. But if you throw in some fake invoices then that can generate extra money. “In a rinse and repeat cycle,” write the lawyers, “Mr. James caused First Brands to fraudulently incur debt financing only to then divert — routinely and regularly — funds from the Debtors for his and his family’s personal benefit.”

Here is how they describe the alleged faking of invoices:

First, in many instances, the amount set forth on a factored invoice did not accurately reflect a customer’s order, without any apparent reason for the discrepancy. For example, in some instances, the amount set forth in a factored invoice was ten or more times higher than the actual amount of an invoice.

Second, in many instances, purported invoices representing customer orders were created and submitted to third-party factoring parties for payment even though the Debtors’ books and records, in some cases, do not reflect that such customer invoices existed.

Third, in many instances the same invoice was factored more than once to different third-party factors. 

Yeah there it is. For example:

On May 9, 2025, Brake Parts Inc. LLC [a First Brands entity] sold automotive parts to General Motors Corporation SPO. An invoice for this sale showed a total of $179.84. On May 19, 2025, that invoice, along with thousands of others, were sent to a former First Brands executive as part of a package of invoices to be nominated to Katsumi Global, LLC, d/b/a Ja Mitsui Capital America (“Katsumi”) for factoring. When the executive sent the list to Katsumi later that day, it listed the very same Brake Parts Inc. LLC invoice, but this time with a value of $9,271.25, representing an extreme modification from the original May 9, 2025 invoice amount of $179.84. The values of numerous other invoices in the package also had been changed, including some invoices that were listed at net values and purchase prices approximately more than $15,000 and $12,000 higher, respectively, than the invoice value listed in the original document. Ultimately, the factoring company purchased the package of invoices including the modified invoice (along with other invoices) at a cost of approximately $11.18 million, but the actual value of the invoices was only approximately $2.3 million.

Right, if you get a package of thousands of invoices and buy them that same day, you are not going to forensically examine each one. And then one thing leads to another and maybe you are paying $11.18 million for $2.3 million worth of receipts, oops.

Anyway the party seems to be over. The Wall Street Journal reports:

A string of alleged frauds by corporate borrowers is spurring a reckoning across Wall Street, sending bankers and investors scrambling to prevent future blowups.

Lenders are increasing due diligence and demanding a longer history of financial data from companies. Some are inserting conditions that permit them to do more frequent checkups before agreeing to make loans. A group of the biggest names in banking, investment management and accounting have formed a task force that will take a deeper look at the nature of the problem and how to protect investors. …

“This is sending real ripples in the credit markets,” said Colin Adams, partner at Uzzi & Lall, a restructuring adviser that works with both borrowers and financing providers. “People are really starting to ask: ‘How does this happen?’ ”

It happens because it is often useful and efficient to be able to finance your business by forwarding electronic lists and getting back money. But sometimes people will take advantage of that.

Which mutual fund would you rather invest in?

1. Fund 1, which gets roughly market performance and charges fees of 0.05% per year, or 
2. Fund 2, which gets roughly market performance and charges fees of 0.75% per year?

When I put it like that, you will probably choose Fund 1. Those funds are kind of the same except for fees, and you’d rather pay lower fees. This might be the wrong choice — maybe Fund 2 will sustainably outperform Fund 1 by more than 0.7% per year — but it does seem like the sensible choice on the information you have. This is very much conventional wisdom in self-directed investing these days: The thing that you can control is fees, so you control the fees.

Not everyone is a self-directed investor, though. Some investors have financial advisers. If you are a financial adviser, which investment would you rather put your clients in? Well, lower fees are good, but maybe you have a reason to think Fund 2 will outperform. Maybe you have met with the managers of these funds and you like the cut of Fund 2’s manager’s jib. She has a smart repeatable process to generate alpha, etc., I don’t know, I’m mostly kidding about this paragraph.

No, the real appeal of Fund 2 to a financial adviser is that, with the extra 0.7% per year of fees, Fund 2 can give you some. If you put $100 million of client assets into Fund 2, that will generate $750,000 of fees for Fund 2, and they can split that with you. They’ll give you $250,000 for selling Fund 2 and keep $500,000 for themselves. Whereas Fund 1 is only getting $50,000 per $100 million of client assets; it needs all of that to keep the lights on and won’t give you anything.

Oh of course your obligation is to give your clients the best investment, but, again, you did meet with the manager of Fund 2 (when she was handing you the bag of cash). Maybe you asked her “hey do you have a smart repeatable process to outperform the market on behalf of my clients” and she was like “here’s a bag of cash” and you were like “sounds like a yes!”

I am being very loose with all of this. Historically this was absolutely how mutual funds worked: Brokerage customers got their investing advice from non-fiduciary brokers, the brokers got paid big commissions to sell lucrative products to the customers and there were huge obvious conflicts of interest. There has been a gradual modern move away from that system: More people get their advice from fiduciary advisers now, there are more rules regulating brokers’ and advisers’ conflicts of interest, there is more focus on fees, etc., so just handing brokers bags of cash to put their customers into expensive funds is now somewhat frowned upon. 

There are gray areas. We talked in March about First Trust Portfolios LP, an exchange-traded fund manager that (1) charges relatively high fees and (2) takes financial advisers out to relatively nice dinners. I wrote that “one of the main problems in finance is the principal-agent problem, and one of the main forms that it takes is steak dinners.” Again, historically, an important form that it took was direct cash payments, [4] but these days it more often takes the form of dinners and sports tickets.

Yesterday the Financial Industry Regulatory Authority announced that it was fining First Trust $10 million for this sort of thing:

First Trust provided gifts, meals and entertainment to representatives of retail broker-dealers (client firms) that sold First Trust investment company securities, which significantly exceeded FINRA limits for non-cash compensation. In certain instances, First Trust preconditioned the non-cash compensation on client firm representatives achieving sales targets with respect to First Trust products (e.g., exchange-traded funds and unit investment trusts). ...

“FINRA’s non-cash compensation rule is designed to protect investors by preventing financial recommendations from being unduly influenced by excessive gifts, entertainment or other perks supplied to broker-dealers or their registered representatives,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA.

The rule generally allows fairly large disclosed cash sales commissions, but again those are somewhat out of fashion these days. As far as non-cash compensation goes, it’s limited to gifts worth less than $100 per persona annually and “an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.” First Trust did … something different. The Finra order has various examples:

On more than 25 occasions, two First Trust wholesalers provided Client Firm representatives with two courtside tickets to professional basketball games, at a cost of approximately $3,200 for the pair, to use without being accompanied by a First Trust employee.

Going to a basketball game with the salesperson might be a reasonable business expense: You go to the game together and discuss First Trust’s smart repeatable process to outperform the market. Going to the game without the salesperson is just a gift.

Or rather, it’s a gift if the salesperson gives it to the adviser out of the goodness of the salesperson’s heart, hoping perhaps to create a sense of gratitude and friendship in the heart of the adviser, but without any explicit quid pro quo. If the salesperson is like “hey I’ll give you these basketball tickets if you put $10 million of client assets in my funds” then it’s not quite a gift; it’s more of a bribe. There was some of that too:

A First Trust wholesaler preconditioned tickets to a professional hockey game on a Client Firm representative selling $1 million in First Trust unit investment trusts (UITs) to his customers. The Client Firm representative’s customers ultimately purchased that amount of UITs and First Trust provided the tickets to the Client Firm representative after the transaction as a gift.

A Client Firm representative asked a First Trust wholesaler if the Firm would pay for certain costs of an event hosted by the representative for the representative’s clients. First Trust declined, but the wholesaler responded that the Firm was “Happy to do future events for you if [you want] to work together,” and then stated: “I’ll keep you informed of at least the fun events. $1M turns on the green light of support. $10M and I never say no.”

Not ideal!

I asked yesterday for ideas on how to get Elon Musk super-voting stock in Tesla Inc. The premise of the question is that (1) Musk would like to have at least 25% of the voting power of Tesla because “I just don’t feel comfortable building a robot army here” with less control, (2) he only has about 15% of the voting stock now, (3) stock exchange rules prohibit public companies from issuing new high-vote shares or otherwise “disparately reduc[ing] or restrict[ing]” the voting power of public shareholders, so (4) Tesla’s board is trying to get Musk to 25% by giving him  new regular shares with a headline valuation of $1 trillion, which is too much for some big shareholders. If there was a way to get him extra votes without giving him extra economic ownership, that would be a lot cheaper. But is there?

I got so many suggestions. It is the perfect Money Stuff exercise for the reader; my readers love tricky legal and financial structuring and also Elon Musk. I don’t think I got any that are slam-dunks, but let me discuss a few of them.

The most promising suggestions I got were along the lines of “reverse merger.” Specifically:

1. You set up an Elon Musk Special Company where Musk has supervoting shares.
2. EMSC acquires Tesla in an all-stock merger, giving Tesla’s public shareholders low-vote shares and getting Musk to his desired voting power.

There are variations on this. EMSC could be a new shell company that merges with Tesla purely to accomplish this. Alternatively, you could restructure an existing private Musk company — someone suggested Boring Co., but the better suggestion is xAI, which Tesla is contemplating investing in anyway, and which is arguably adjacent to Musk’s robot army plans — to give Musk the correct super-voting shares, and then merge that with Tesla. In any version of this, Tesla’s board and shareholders would have to approve a somewhat odd merger, but then, Tesla’s board and shareholders love approving somewhat odd things for Musk, so that is not a huge problem. Also the new company would have to get listed on a stock exchange, which is a little annoying given that this is all about avoiding stock exchange rules, but still. It’s a possibility, but it’s significantly more complicated than just giving him more stock: It’s a substantive restructuring of his empire, rather than just more votes at Tesla.

Several readers suggested some variation on “give him irrevocable proxies.” That is, there are some shareholders — particularly retail holders — who love Musk; could they just sign over their voting rights to him? I think the answer is “maybe” — there is some precedent for irrevocable proxies — but I don’t think it really addresses the problem. For one thing, what if they sell their shares? But also, in this scenario, the people signing over their voting rights are the ones who would vote with him anyway. He doesn’t really want 25% of the votes: He wants 25% of the votes for himself plus, you know, 26% of the votes in the hands of people who like him. “There needs to be enough voting control to give a strong influence, but not so much that I can’t be fired if I go insane.” Getting to 25% by having the people who already support him commit to supporting him doesn’t address the problem.

One fun suggestion was “derivatives.” We have talked a few times about the standard way to buy votes in corporate proxy contests: If you want 10% of the votes but only 5% of the economic ownership, you buy 10% of the stock and sell total return swaps on 5% of the stock. Net, your economic ownership is 5%, but your swaps don’t reduce your votes. You could imagine something like that here: Give Musk an extra 12% of the stock, but have him write a contract promising to pay Tesla back any gains on that stock. This strikes me as not very workable. For one thing it is hard to imagine coming to the CEO of a public company and saying “hey good job getting the stock price up but now you owe us $1 trillion”: The incentives and optics are not quite right. (Of course in this scenario he is up $2 trillion, but still: The gain is unrealized, but the debt has to be paid in cash.) Also seems like it could create tax problems, and the accounting for Tesla would be very messy.

One other suggestion that I got was less tricky and more economically logical. From a reader email:

Step 1. Spin off the Robot Army Division and IPO it.
Step 2. Offer TSLA shareholders the option to exchange their stock for new Robot Army Company shares.
Step 3. Elon exchanges his TSLA shares for Robot Army Company shares. 

Correct me if I’m wrong, but if the Robot Army Company is worth half the market value of Tesla, then Musk should be able to get to 25% ownership of Robot Army Company by exchanging his shares. 

Elon believers get a more focused (maybe) Elon to build their Robot Army, and a normal car company CEO can run Tesla at a market rate salary. 

Musk’s expressed concern is that “I just don’t feel comfortable building a robot army here” unless he has 25% of the votes. But why build a robot army there? Split Tesla into the car company and the robot army company, give him 25% control of the robot army company, and in exchange give him less of the car company that he is obviously bored with.

I think that this plan especially doesn’t work, but it is interesting to think about why. Some combination of “the robot army company needs the cash flow from the car company to work” and “the car company trades at a very high multiple because of the magic robot army dust that Musk sprinkles on it, and without that it’s just a car company.” This plan is quite clarifying, which is why it’s impossible.

Meanwhile at the car company. One stylized fact about American politics is that Democrats are much more likely to buy electric vehicles than Republicans, because they are more concerned about climate change. And so as of, say, 2020, most people who bought Teslas were Democrats. Then Musk became a vocal Republican. Was this good for business? I mean. One could imagine. Perhaps Tesla had fully saturated the Democratic market, and Musk’s hard right turn could win entirely incremental Republican business. (For a little while Donald Trump was doing Tesla advertising at the White House!) But probably not, no. My vague anecdotal sense of American politics in 2025 is that (1) Democrats now do not buy Teslas and (2) Republicans still don’t buy electric cars. 

Here is “The Musk Partisan Effect on Tesla Sales,” by Kenneth Gillingham, Matthew Kotchen, James Levinsohn and Barry Nalebuff, all of Yale. You can probably guess the effect but they do some science:

Using county-level, monthly data on new vehicle registrations, we leverage how changes in vehicle sales over time diverge across counties with differing shares of Democratic and Republican voters. Without the Musk partisan effect, Tesla sales between October 2022 and April 2025 would have been 67-83% higher, equivalent to 1-1.26 million more vehicles.

Sure okay. We talked once about a proposed-but-not-actually-filed securities fraud lawsuit against Tesla over this. You know the drill: Investors bought Tesla stock thinking that Elon Musk would try to get people to buy Teslas, instead Elon Musk became a Republican, Tesla sold fewer shares, the stock dropped, [5] etc. 

Onset Financial is a financing company that was caught up in the First Brands bankruptcy. The Financial Times had a big profile of Onset last week, and there is a corporate rap video involved. Here it is. Louis Ashworth at FT Alphaville writes that, “from the dodgy audio mixing that leaves some vocal sections inaudible to the style of the beats themselves, ‘Onset Closers’ firmly carries the hallmarks of amateur ringtone rap,” but adds that “the unknown rapper’s actual flow, however, is basically fine”: This does not seem to be a case of “employees of financing firm rap in a corporate video” but rather “financing firm hires professional corporate rapper for a motivational video.” Still the video does feature a lot of Onset employees, like, doing finance stuff and occasionally jumping around and looking tough. I must reiterate the only advice that this newsletter ever provides, which is that you should never participate in a corporate rap video.

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