Back in September, a big subprime auto lender filed for bankruptcy amid allegations that the company had defrauded its bank lenders.
Three months later, federal prosecutors in New York announced criminal fraud charges against two top executives of the company, Tricolor Auto, and that two other executives had already pleaded guilty to fraud-related charges.
The four-count indictment filed by prosecutors in New York on Wednesday charges Daniel Chu, Tricolor’s founder and former chief executive, and Dave Goodgame, the company’s former chief operating officer, with orchestrating a multiyear scheme that defrauded several banks and private investors. Among the accusations are that the former executives posted about “$800 million in bogus collateral” to obtain loans and other lines of credit.
The collapse of Tricolor in September caused concern on Wall Street of potential widespread problems in the subprime auto industry, which extends loans to borrowers with shaky credit histories.
Loans made by subprime lenders are typically used as collateral for the companies to get financing from banks and other credit providers, so the auto lender can make more loans to consumers.
JPMorgan Chase was one of the big banks that had lent money to Tricolor using the auto loans as collateral. And shortly after the company failed, Jamie Dimon, the bank’s chief executive, warned that the collapse of Tricolor and an unrelated auto-parts supplier could be a sign of weakening corporate lending practices. He said, “When you see one cockroach, there are probably more.” Earlier this year, JPMorgan recorded a $170 million charge-off related to Tricolor’s collapse.
Concern about corporate lending remains an issue on Wall Street amid signs of slowing economic growth and consumers pulling back on spending. But for now it appears that the problems at Tricolor were the result of a fraudulent scheme that federal prosecutors said began in 2018, rather than a more systemic problem in the lending industry.
Tricolor, based in Dallas, had focused on Hispanic customers looking to buy used cars. But the primary victims of the fraudulent scheme outlined by prosecutors were the company’s bank lenders and investors.
“Tricolor repeatedly lied to banks and other credit providers, including by falsifying auto-loan data and ‘double pledging collateral,’” said Jay Clayton, the U.S. Attorney for the Southern District of New York, in a statement. “Fraud became an integral component of Tricolor’s business strategy.”
Mr. Chu was scheduled to appear in court on the charges in the Southern District of Florida sometime on Wednesday. His lawyer was not immediately available for comment. Mr. Goodgame is set to appear on Thursday in the Northern District of Texas, according to the statement. It was not immediately clear who was representing him.
The apparent scheme began to collapse this past summer when some lenders raised concerns with the company about potential problems with the collateral it had posted for loans. The authorities said they were in possession of secretly recorded phone calls and other communications in which Mr. Chu tried to come up with a strategy to blame the banks for doing poor due diligence to uncover the fraud and “use that threat as leverage” with the banks in not going public with their concerns.
Prosecutors said that Mr. Chu used the scheme to personally enrich himself by taking tens of millions in compensation and buying a property in Beverly Hills, Calif., just weeks before the bankruptcy filing.
In filing the charges, federal prosecutors said they had secured guilty pleas from the company’s former chief financial officer, Jerome Kollar, and another former executive, Ameryn Seibold. Both are cooperating with the investigation, prosecutors said.
Mr. Clayton also held a news conference at the U.S. Attorney’s office in Lower Manhattan to discuss the filing of charges.
At the news conference, Mr. Clayton was asked about another pressing matter — the planned imminent release by the Justice Department of all the files and information it had gathered as part of the criminal investigations in 2019 into the disgraced financier Jeffrey Epstein. Attorney General Pam Bondi recently asked Mr. Clayton to investigate some lingering issues arising from Mr. Epstein’s criminal case, which ended in 2019 when he killed himself while awaiting trial on sex-trafficking charges. Last month Congress mandated that the Justice Department begin releasing the files by Dec. 19.
“We’re going to meet our obligations under the act and meet our obligations to the court,” Mr. Clayton said.
Benjamin Weiser contributed reporting.
Matthew Goldstein is a Times reporter who covers Wall Street and white-collar crime and housing issues.
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