First Brands Boss Resigns and Jefferies Seeks to Calm Its Investors

Jefferies Financial said its own exposure to First Brands is limited to roughly $45 million. - Jeenah Moon/Bloomberg News

Patrick James, the chief executive of bankrupt auto-parts supplier First Brands, has resigned his position after accounting irregularities came to light.

James led the company through a rapid expansion in recent years and used debt to accumulate 25 automotive-parts suppliers. First Brands collapsed into bankruptcy in late September with $10 billion in debt. New directors have said they are probing accounting irregularities associated with its complex financing arrangements.

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“Patrick James has resigned from his role as chief executive officer,” a spokesman said. “Mr. James has always prioritized the company’s interests above his own.” James was the company’s founder and sole equity owner.

Meanwhile, Jefferies Financial sought to reassure investors that it can absorb any potential losses related to the First Brands bankruptcy, after its shares fell 18% last week. Last week, the Wall Street bank disclosed its Point Bonita Capital investment fund had about $715 million of exposure to First Brands.

“No matter what the ultimate outcome is, this episode, while extremely unfortunate and disappointing, is manageable and any losses will be readily absorbable,” the bank’s leaders said in a joint letter. Nobody at Jefferies was aware of any possible fraud at First Brands, they said.

First Brands relied heavily on funding backed by accounts receivables, or payments due from customers. When it entered bankruptcy in September, advisers said they found $2.3 billion was owed to purchasers of the receivables that hadn’t been paid. Lenders to the company are braced for steep losses.

However, Jefferies said its own exposure is limited to roughly $45 million, and can be easily absorbed without threatening its financial condition or business momentum. The sum covers the bank’s share of money owed to Point Bonita and to another financing platform in which Jefferies has an interest.

In a joint statement, the bank’s chief executive, Rich Handler, and its president, Brian Friedman, said the hit to Jefferies’ stock-market value and credit perception was “meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood.”

Point Bonita, as an investment manager, mainly has outside investors such as other financial firms. As with almost all managed investments, it is the funds’ investors who would bear Point Bonita’s losses.

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Jefferies said it is working with Point Bonita investors. Those that want to redeem their money will be able to do so, with four quarterly payouts split over the next year.

The bank said it is in “sound financial condition,” and that a September agreement with shareholder SMBC has put it on even firmer footing. SMBC, the commercial-banking subsidiary of Japan’s Sumitomo Mitsui Financial, has agreed to increase its stake in Jefferies and extend up to $2.5 billion of new credit.

Jefferies will meet with stockholders Thursday at an annual investor meeting.

Write to Alexander Gladstone at [email protected] and Margot Patrick at [email protected]

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