A lender that owns First Brands Corp. debt sued auditor BDO USA P.C., alleging it failed to detect problems at the auto parts supplier before it collapsed into bankruptcy and federal prosecutors
Funds managed by Black Diamond Capital Management said in an April 29 lawsuit that BDO's audits did not comply with generally accepted auditing standards because they missed "numerous" risk factors, including First Brands' extensive use of factoring and hundreds of millions of dollars in transfers to James' personal trust.
The Black Diamond affiliates said they relied on BDO's audits when it bought about $70 million of First Brands' senior debt. It now expects a loss in the bankruptcy, like other creditors. James has denied wrongdoing and pleaded
The lawsuit accuses BDO of negligence, negligent misrepresentation, fraudulent misrepresentation and tortious interference with contract. It seeks damages equal to the principal and interest on the outstanding debt the Black Diamond funds own. The Financial Times earlier reported the lawsuit.
"A properly planned and conducted audit, with the auditor applying due professional skepticism to contradictory or implausible information, would have detected red flags, inconsistencies, and evidence requiring further investigation - all signs of the rampant fraud that was ongoing for at least eight years before First Brands' collapse," the lawsuit said.
A BDO spokesperson said Thursday that the lawsuit lacks merit. A new independent report and criminal indictments against James and other former executives shows "that the First Brands fraud was conducted in a way to deceive BDO as its auditor," the accounting firm said.
Professional standards governing BDO's audits of First Brands "expressly contemplate the inability of an auditor to detect the kind of collusive fraud perpetrated by First Brands," BDO said.
The lawsuit followed an April 27 report by a bankruptcy examiner. In the report, lawyer Martin De Luca cited a former executive who said the company switched audit firms because BDO "was viewed as less rigorous" and had an unsophisticated process that let the business "do what we want with these guys."
De Luca said witnesses reported that BDO did not directly access underlying enterprise systems such as Oracle or consistently perform independent verification of other information. But he also said his investigation is incomplete and that more work is needed to determine whether First Brands' auditors complied with generally accepted auditing standards.
In response, a BDO spokesperson said the examiner's report did not include interviews with BDO personnel or a review of the firm's files. BDO also said the report "reaches inappropriate and factually inaccurate conclusions about our audit work based on hearsay from individuals involved in the fraud."
"BDO reaffirms that its audits of First Brands were performed in a way completely consistent with professional audit standards," the firm said.
First Brands filed Chapter 11 in September with more than $11.5 billion in liabilities, including $6 billion in long-term debt and at least $2.3 billion in off-balance-sheet financing. Two former First Brands executives have pleaded guilty to criminal charges tied to the company's collapse.
The company
The case is Black Diamond Credit Strategies Master Fund et al. v. BDO USA P.C., number cv-26-137992, in the Ohio County Court of Common Pleas.
