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Western Alliance has sued investment bank Jefferies, alleging breach of contract and fraud over loans tied to the First Brands collapse.
The lawsuit, filed in New York state court on Friday, came after Jefferies informed the regional bank that it would not complete payments related to a First Brands-linked loan after the borrower defaulted.
The collapse of Ohio-based car parts distributor First Brands last year sent shockwaves through Wall Street and raised concerns about the quality of investments backed by the private credit sector.
Western Alliance said it was still owed $126mn, which it would write down. Shares in the regional bank fell 13 per cent in early trading, while Jefferies shares fell 9.5 per cent.
“I will state plainly, in my entire banking career, I have never witnessed a breach of contract that so deliberately places the reputation and operating integrity of a counterparty at risk,” said Western Alliance chief executive Kenneth Vecchione on a call about the lawsuit.
He added that Jefferies’ failure as a counterparty would “force future banks, clients and counterparties to seriously re-evaluate [its] dependability”.
Jefferies said in a statement about the lawsuit: “We regret that the bank, as well as a range of lenders to and around First Brands, will suffer losses as a result of this fraud. We believe that the lawsuit is without merit and it will be defended vigorously.”
Western Alliance said it would take a charge-off related to the loan balance in the quarter.
The Arizona-based bank alleged in its complaint that “greed led [Jefferies] to induce a lender to finance a phony receivables scam perpetrated by Patrick James and Edward James”, the founder of First Brands and his brother, who were both indicted on fraud charges by federal prosecutors in January.
In its complaint, Western Alliance alleged that it made a new $337mn loan against $600mn of First Brands receivables — money supposedly due from its customers — in August last year, weeks before the car parts supplier collapsed in an alleged fraud.
The loan provided financing to Jefferies’ Point Bonita Capital fund, an investment vehicle at the bank that specialised in financing customer and supplier invoices that built up $715mn of exposure tied to First Brands.
Federal prosecutors have since alleged that First Brands falsely inflated invoices and double- and triple-pledged collateral in order to “fraudulently obtain billions of dollars from lenders”.
Western Alliance alleged that Jefferies “became aware of serious problems at First Brands” while it was negotiating the loan and failed to file crucial claims over the collateral, “likely facilitating the double- and triple-pledging of receivables”.
Western Alliance also alleged that Jefferies was legally obliged to repurchase the First Brands receivables after issues arose, but “refused” and that Jefferies now claimed its Leucadia Trade Finance division behind the Point Bonita fund was “insolvent”.
Western Alliance’s legal complaint marks the second lawsuit Jefferies has faced over its financing of First Brands.
The investment bank was sued last month by an investor with $25mn in the Point Bonita fund for “fraud, negligent misrepresentation and breach of fiduciary duty”.
The investor, Eugenia, alleged that Jefferies had told investors that it would have control over cash collection accounts tied to First Brands customer financing, but in fact allowed the auto parts supplier to manage these accounts.
Eugenia’s complaint in a New York court described this as appointing “the proverbial wolf . . . to run the hen house”.
Jefferies said in response to that lawsuit that it “unequivocally did not engage in fraud”, would “vigorously defend against these specious claims” and that it expected to “prevail on the merits”.