After Jefferies, BlackRock Also Dragged In? Exposed as Involved in a "Stunning" Fraud Case by a Lender

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After Jefferies triggered market turmoil due to the First Brands blowup, BlackRock, the world's largest asset management company, has also been exposed to the “black box” of private credit and is reportedly involved in a private credit fraud case.

On Thursday, October 30, Eastern Time, media reported that BlackRock's private credit division HPS Investment Partners and other lenders are trying to recover hundreds of millions of dollars, accusing a business owner of falsifying accounts receivable as loan collateral, in a "shocking" fraud case.

According to the report, the lenders filed a lawsuit in August against Bankim Brahmbhatt, owner of telecom service companies Broadband Telecom and Bridgevoice, claiming his companies owe more than $500 million. BNP Paribas participated in BlackRock HPS’s financing arrangement, providing nearly half of the involved loan, about $220 million. Brahmbhatt’s lawyer stated his client denies the fraud allegations.

This case once again brings the opaque corners of asset-backed lending in private credit under the spotlight. In recent months, the sudden collapses of First Brands and Tricolor in the auto sector have led to doubts about risk control in the field. Wall Street is concerned these incidents could be early warning signs of deeper problems in the US credit market.

Details of the "shocking" fraud: Forged emails and fake invoices

Earlier this year, BlackRock acquired credit giant HPS, expanding its private asset investment portfolio. Since September 2020, HPS has provided loans to at least one financing subsidiary, Carriox, under Brahmbhatt’s telecom companies, with investment size increasing from about $385 million initially to about $430 million by August 2024. Insiders say BNP Paribas provided nearly half of the funds for this loan.

When HPS started lending, it hired Deloitte to conduct random client checks to verify assets, and later appointed accounting firm CBIZ for annual asset inspections. However, in July this year, an HPS employee noticed abnormal email addresses purportedly from Carriox customers. Insiders said these emails came from fake domains imitating genuine telecom companies, and a review of historical emails showed the same problem.

When HPS officials questioned Brahmbhatt about these anomalies, he assured them there was no issue. Afterwards, he stopped answering calls. In July, a person working with HPS visited Brahmbhatt's office in Garden City, New York, and found it closed. Last Wednesday, the media found Brahmbhatt’s office suite locked and apparently vacant, and there was no answer at his residence.

Clients deny any business dealings, lenders allege systematic fraud

After HPS employees discovered anomalies, CBIZ and law firm Quinn Emanuel, at the request of the lenders, began investigating customer emails shared by the borrower. Court documents show many email addresses did not match the clients’ public domains. Belgian telecom company BICS clearly denied any relationship with the emails Brahmbhatt’s company shared with the lenders.

Attachment to the August lawsuit shows, on July 18 a BICS security officer wrote to a Quinn Emanuel lawyer: "This is indeed a confirmed attempt at fraud."

Lenders allege in the complaint that the investigation determined every customer email used for invoice verification provided by Brahmbhatt’s companies over the past two years was fabricated. They also found fake customer contracts dating back to 2018. "Brahmbhatt created a carefully crafted balance sheet, but these assets only exist on paper," wrote the lenders’ lawyer. The lawsuit also alleges Brahmbhatt transferred assets meant as collateral to offshore accounts in India and Mauritius.

Brahmbhatt’s telecom company filed for bankruptcy in August, and its finance arms Carriox Capital II and BB Capital SPV also joined bankruptcy proceedings last week. BNP Paribas said in its quarterly report to regulators Tuesday that it has set aside an additional 190 million euros (about $220 million) in loan loss provisions for a “specific credit situation,” though a spokesperson declined to say whether it was related to Carriox.

Risks of asset-backed financing come to the fore as regulatory focus increases

The asset-backed financing involved in this case is a debt transaction collateralized by revenues, equipment, or accounts receivable from specific business operations. This market has grown significantly along with the overall expansion of the private credit industry, but problems have recently erupted one after another.

Auto parts supplier First Brands filed for bankruptcy after losing market confidence due to off-balance sheet debt, causing Jefferies’ stock price to plunge about 18% from late September to mid-month, wiping out about $2.5 billion in market value. Auto dealership chain Tricolor also applied for bankruptcy after being accused by bank partners of pledging fictitious auto loans.

This Thursday, media learned that HPS has told some clients they believe Brahmbhatt is now in India. The investment represents a small portion of the $179 billion in assets managed by HPS. People close to BlackRock said writing off this loan would not significantly affect the performance of the HPS fund holding it this year, and noted HPS had been receiving repayments on the loan until this year. Brahmbhatt personally filed for bankruptcy on August 12—the same day his telecom company did—after previously providing a personal guarantee at the lenders’ request.

The revelations on Thursday have further darkened the already tense private credit market in the wake of the First Brands incident, highlighting the systemic weaknesses that still exist in due diligence and risk control in this $2 trillion industry.

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