Writer: Andrew Allen
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
The latest chapter in the ongoing saga of Tricolor Holdings demise took place this week as the company’s Founder and former CEO, Daniel Chu, and its former Chief Operating Officer, David Goodgame, both entered not guilty pleas to charges that they carried out fraud during their time with the company.
The story of Tricolor’s fall from grace offers a sobering reminder to lenders operating in the subprime space. Specifically, while the risk that subprime lenders take on when they offer loans to individuals can lead to financial losses, the risk of engaging in fraud can lead to criminal charges.
Chu and Goodgame face multiple charges related to their alleged roles in schemes that aimed to defraud lenders and investors the company worked with.
“Tricolor defrauded multiple lenders; they told multiple lies, and most disturbingly, the direction to do it came from the top,” Jay Clayton, U.S. Attorney for the Southern District of New York, said during a press conference last month, according to Bloomberg.
While Chu and Goodgame have pleaded not guilty, other employees of Tricolor have admitted guilt and cooperated with the government on the case.
Though the fraud at Tricolor may have begun with the company’s leaders, employees at any level can engage in misconduct that brings risk to their employer.
Lenders should regularly review company policies and procedures to ensure that they have safeguards preventing employees from manipulating loan descriptions or otherwise engaging in activities that could lead to fraud.
Two of the company’s other leaders, including its former Chief Financial Officer, Jerome Kollar, have already pleaded guilty to charges stemming from misconduct at Tricolor. Bloomberg reports that the former Tricolor employees are cooperating with the government on the case.
Tricolor’s Partners Also Face Losses
Tricolor filed for bankruptcy this past September, and many lenders and investors in the U.S. may face damages related to the dealings they had with the company. A recent report indicates that, in total, Tricolor’s partners were facing more than $900 million in potential losses in the wake of the company’s collapse.
Lenders including JPMorgan Chase and Fifth Third are among the group of companies that have been preparing for losses related to their dealings with Tricolor.
Prosecutors say that Chu led the charge to implement a plan that manipulated descriptions tied to loans and made assets appear more valuable than they really were.
It’s unclear at this time exactly what strategies the legal teams for Chu and Goodgame aim to use to defend their clients. But Chu’s lawyer said that many of the allegations that others have made about his client aren’t accurate, according to Bloomberg.
Chu and Goodgame may find themselves in prison if they are found guilty of the crimes prosecutors have charged them with.
Lending companies can face challenges detecting activities with the potential to lead to widespread fraud. Internal auditors should be aware that early signs of fraud can sometimes appear as inconsistencies in data or delays in reconciliations.
Subprime lenders can look to the case of Tricolor Holdings as a warning to stay vigilant in their attempts to fight fraud from both external and internal sources.
Chu and Goodgame face counts that could land them in prison, showing that those involved in lending-related fraud can not only cause damage to the companies they work for but also to their personal lives.
