Dive Brief:

• Asset-backed securities investors sued JPMorgan Chase, Barclays and Fifth Third on Thursday, accusing the banks of ignoring “giant red flags” about bankrupt subprime auto lender Tricolor and “enabling” its “massive fraud.” 
• Tricolor operated “a blatant double-pledging scheme,” where a single auto loan was pledged as collateral for multiple warehouse credit lines with different banks, and the company often continued doing so after that auto loan was sold into a securitization, the investors said. Auditors made the banks aware of various issues in 2022 and 2024; “the only question that remains is how the Defendants failed to stop it,” the lawsuit said.
• The situation has resulted in hundreds of millions of dollars in lost value, the investors said. Spokespeople for JPMorgan, Barclays and Fifth Third declined to comment on the suit.

Dive Insight:

Dallas-based Tricolor, a subprime auto lender and used car dealer, filed for bankruptcy in September. 

In December, the Justice Department charged Tricolor founder and former CEO Daniel Chu with orchestrating a years-long financial crimes enterprise, bank fraud and wire fraud. Tricolor’s former CFO, Jerome Kollar, and two other former executives were also hit with charges. Chu has pleaded not guilty. 

JPMorgan, Barclays and Fifth Third financed Tricolor’s origination of auto loans through warehouse lending facilities and underwrote Tricolor’s sale of asset-backed securities, which refers to the bundling of loans to create securities that are then sold to investors. 

In the lawsuit, the group of 30 investors, including firms Janus Henderson and One William Street Capital Management, accused the banks of concealing and misrepresenting “clear evidence of Tricolor’s fraudulent conduct” in materials sent to asset-back securities investors.

In doing so, the lenders “fueled and perpetuated Tricolor’s Ponzi-like fraud,” which involved inflating loan collateral it used to obtain financing and repaying the banks’ warehouse lines using cash from asset-backed securities sales secured by such loans to new investors, the lawsuit said. 

Investors blasted the banks for “their willful blindness to obvious evidence of fraud and immense financial incentives to ignore it,” including structuring and underwriting fees and interest income.

The banks were “privately warned for years” of Tricolor’s forthcoming implosion, with auditors in 2022 and 2024 flagging “numerous alarming issues” with Tricolor’s loan reporting to the banks, the investors alleged. 

Payments were posted to the wrong bank account for the wrong lender, defaulted loan accounts showed recoveries never obtained for car repossessions that never occurred, and loan delinquencies were inaccurately reported and aged, the lawsuit said. Audits also revealed Tricolor’s “pervasive internal control weaknesses,” which didn’t improve from 2022 to 2024, the investors alleged.

Tricolor also “engaged in widespread obstructionist conduct,” of which the JPMorgan, Barclays and Fifth Third were made aware through the audit process, the lawsuit contends.

“Rather than risk a massive loss on their warehouse lines and forfeit the millions of dollars of fees and income derived from Tricolor’s fraudulent enterprise, Defendants responded by hiding what they had learned and sticking their heads in the sand to avoid learning more,” investors alleged in the suit, filed in the U.S. District Court for the Southern District of New York. 

The group of investors collectively holds about $230 million in Tricolor asset-backed notes, the lawsuit said. Their notes now trade for pennies on the dollar.

Investors wouldn’t have bought securitized notes at the prices paid, “or at all, if Defendants had fully and accurately disclosed what they knew about Tricolor’s deficient processes and controls, its executives’ checkered backgrounds, and the pervasive evidence of fraud in its loan data,” the investors said.

New York City-based JPMorgan reported a $170 million charge-off in the third quarter of 2025 related to Tricolor. CEO Jamie Dimon said it was not the bank’s “finest moment.”

“When something like that happens, you could assume that we scour every issue, every universe, everything about how it could be taking place,” to make sure it doesn’t happen again, Dimon said in October. “You can never completely avoid these things, but discipline is to look at it in cold light, and go through every single little thing, which you can imagine we’ve already done.”

Also in the third quarter last year, Cincinnati-based Fifth Third reported a $178 million charge-off tied to Tricolor. Fifth Third executives called the Tricolor situation “isolated” and clear “fraud,” but the company conducted a comprehensive review of its asset-backed finance portfolio in light of the occurrence. 

“We identified a couple of things that we’ll start to implement from an enhancement standpoint, and we’ll continue to do that, and we continue to reinforce some of the ongoing monitoring that needs to take place in that space,” Fifth Third’s former chief credit officer, Greg Schroeck, said during the bank’s October earnings call. 

British lender Barclays reported a $150 million loss related to Tricolor in the third quarter of last year. 

“The fact that it was fraud is no excuse. We have looked at what lessons we can learn from that and apply that across our portfolios,” Barclays CEO C.S. Venkatakrishnan told analysts during the bank’s October earnings call. “We will likely be monitoring our portfolios more carefully, particularly understanding the impact of changed economic conditions on companies and looking closely at the strength and independence of financial controls.”