Investors holding notes issued by Tricolor Holdings have filed a lawsuit against JPMorgan Chase & Co., Barclays Plc and Fifth Third Bancorp., according to InvestmentNews.
The plaintiffs suffered losses on securities issued by Tricolor, a now-bankrupt subprime auto lender, and they accuse the banks of missing “giant red flags” when fraudulently marketing the debt.
The lawsuit was filed in Manhattan federal court by several investment firms including One William Street Capital Management, Ellington funds, and Janus Henderson Group Plc., who said they collectively hold more than $230 million in Tricolor notes.
Tricolor, which provided auto loans to lower-income communities, filed for Chapter 7 bankruptcy in September 2023. The lawsuit claims the banks perpetuated a Ponzi-like scheme by financing and securitizing Tricolor’s loans, even after internal audits reportedly revealed inaccurate loan data and mismanaged cash flow. The banks are accused of knowingly selling nearly $2 billion worth of asset-backed securities based on fraudulent subprime auto loans.
The complaint alleges that the defendants “fueled and perpetuated Tricolor’s Ponzi-like fraud” by financing and securitizing its auto loans, on top of their roles as major Tricolor lenders. The noteholders claim in their suit that the banks ignored clear evidence of fraud, including audits of the company from 2022 and 2024 that the plaintiffs described as alarming. The lawsuit alleges the banks overlooked these warning signs because they were earning millions of dollars in fees from underwriting Tricolor’s securitized notes.
According to the noteholders, red flags in the audit reports included “that nearly half the payments received on a given day were posted to the wrong bank account for the wrong lender, that defaulted loan accounts showed recoveries that were never actually obtained from car repossessions that never actually occurred, and that loan delinquencies were inaccurately reported and aged.”
The banks “responded by hiding what they had learned and sticking their heads in the sand to avoid learning more,” the plaintiffs claim. JPMorgan, Barclays and Fifth Third also allegedly concealed or misrepresented concerning information in offering materials for investors.
In December, Tricolor founder and former Chief Executive Officer Daniel Chu and others were charged with allegedly defrauding Tricolor’s banks and investors by double-pledging or inflating the value of loan collateral described as “near-worthless.” Chu has pleaded not guilty to the charges. The Chapter 7 Trustee separately sued Chu, Kollar, and other Tricolor executives in the Bankruptcy Court for the Northern District of Texas.
Spokespeople for JPMorgan, Barclays and Fifth Third were reported to have declined to comment on the suit.
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