Wall Street intensifies scrutiny of fraud after spate of loan losses

A string of alleged frauds by corporate borrowers is spurring a reckoning across Wall Street, sending bankers and investors scrambling to prevent future blowups.

- Sam Goldfarb

Lenders are increasing due diligence and demanding a longer history of financial data from companies. Some are inserting conditions that permit them to do more frequent checkups before agreeing to make loans. A group of the biggest names in banking, investment management and accounting have formed a task force that will take a deeper look at the nature of the problem and how to protect investors.

The frauds that have emerged so far, which involve small to midsize companies in sectors such as autos and telecommunications, haven't sparked widespread trouble in the market or economy. But they have generated fallout for both regional banks and Wall Street giants such as JPMorgan Chase and BlackRock, and the string of revelations has made it harder to dismiss any one case as an isolated event.

"This is sending real ripples in the credit markets," said Colin Adams, partner at Uzzi & Lall, a restructuring adviser that works with both borrowers and financing providers. "People are really starting to ask: 'How does this happen?'"

The worries emerged in late September, when the aftermarket auto-parts supplier First Brands filed for bankruptcy amid questions over whether it had pledged the same accounts receivable to different lenders. Around the same time, the now-defunct auto dealer and subprime lender Tricolor Holding also filed for bankruptcy , facing similar allegations that it fabricated or double-pledged consumer auto loans.