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BlackRock’s private-credit investing arm and other lenders are trying to recover hundreds of millions of dollars after falling victim to what they called a “breathtaking” fraud, marking another breakdown in an opaque corner of the U.S. debt markets, according to a report by The Wall Street Journal.The lenders have accused Bankim Brahmbhatt, the Indian-origin owner of telecom-services companies Broadband Telecom and Bridgevoice, of fabricating accounts receivable that were supposed to be used as loan collateral. The lenders filed suit in August, alleging that Brahmbhatt’s companies owe them more than $500 million, according to The Wall Street Journal report.Brahmbhatt disputes the allegations of fraud, his lawyer said.BNP Paribas and BlackRock’s HPS at the CenterBNP Paribas helped BlackRock’s HPS Investment Partners finance the Brahmbhatt loans, people familiar with the matter told The Wall Street Journal. A spokesperson for the French bank declined to comment.The dispute centers on a kind of debt deal known as asset-based finance, where the borrower pledges as collateral a stream of revenue generated by specified businesses, equipment, or customer receivables. This area of the debt market has grown rapidly alongside the private-credit industry and has recently drawn scrutiny following a series of fraud-linked collapses.Other Cracks in the Private Credit MarketIn recent months, the market has been rattled by sudden collapses in the auto sector that left a trail of losses and fraud allegations.First Brands, an auto-parts supplier, filed for bankruptcy after markets lost confidence in its off-balance-sheet debt.Tricolor, a chain of auto dealers that financed subprime consumers, was accused by a bank partner of pledging fictitious car loans and has also filed for bankruptcy.A lawyer for First Brands’ founder denied any wrongdoing by management, while the chief executive of Tricolor has not responded to requests for comment, according to The Wall Street Journal.Wall Street has been on edge since these episodes, fearing they could be early warning signs of deeper problems in US credit markets.HPS’s Exposure and Loan TimelineBlackRock, the world’s largest asset manager, acquired HPS earlier this year as part of a push to expand its private-asset investing footprint.HPS began lending to a financing arm affiliated with Brahmbhatt’s telecom companies in September 2020, according to The Wall Street Journal.HPS initially lent around $385 million in early 2021.It later expanded the debt investment to about $430 million by August 2024.BNP Paribas financed nearly half of this loan to Brahmbhatt’s Carriox and affiliated entities.HPS told clients that the loans were held in two of its credit funds, people familiar with the matter said.Due Diligence and Verification EffortsWhen HPS first began lending to Carriox, it hired Deloitte to verify assets through random customer checks. Later, it appointed accounting firm CBIZ to conduct annual asset checks, according to The Wall Street Journal.A representative for CBIZ declined to comment, while Deloitte did not respond to multiple requests for comment.In July, an HPS employee noticed irregularities with certain email addresses that supposedly came from Carriox customers. According to the August lawsuit, those emails were from fake domains mimicking real telecom companies, and a review of earlier emails showed similar irregularities.Borrower Stops Responding; Offices Found VacantWhen HPS officials confronted Brahmbhatt about the irregularities, he assured them there was nothing to worry about, and then stopped answering their phone calls, according to The Wall Street Journal.An HPS representative who visited Brahmbhatt’s Garden City, New York offices in July found them closed.On Wednesday morning, the office suite was locked and appeared vacant. An employee at an adjacent business said she hadn’t seen anyone enter or leave recently.At a nearby house listed as Brahmbhatt’s residence, two BMWs, a Porsche, a Tesla, and an Audi were parked in the driveway, while a package by the front door was collecting dust.Fraud Uncovered: Fake Emails, Fake ContractsAfter the irregularities were flagged, HPS hired CBIZ and the law firm Quinn Emanuel to investigate. They examined the customer emails that Brahmbhatt’s companies had shared as proof of invoice amounts.Court documents show that many of the email addresses did not match the public domains of the supposed customers.Brahmbhatt’s businesses claimed to sell telecom infrastructure and services to other companies. However, one of those supposed clients, Belgian telecom firm BICS — denied any connection to the emails presented to lenders.“This is indeed a confirmed fraud attempt,” a BICS security staffer wrote in a July 18 email to a Quinn Emanuel lawyer, as cited in the lawsuit.According to the lenders’ complaint, the investigation determined that every customer email provided to verify invoices over the past two years was fake. They also found fraudulent contracts dating back as far as 2018.‘Assets That Existed Only on Paper’“Brahmbhatt created an elaborate balance sheet of assets that existed only on paper,” lawyers for the lenders wrote in the complaint.They further alleged that Brahmbhatt transferred assets that should have been pledged as collateral to offshore accounts in India and Mauritius.Brahmbhatt’s telecom firms filed for bankruptcy in August, joined by his financing businesses Carriox Capital II and BB Capital SPV soon after.Read More - Russia's Oil Trade With India Strengthens Beyond Crude Oil - Key DetailsBNP Paribas Sets Aside Loan-Loss ProvisionsIn its quarterly earnings filing with regulators on Tuesday, BNP Paribas said it had added €190 million (about $220 million) to its loan-loss provisions to account for a “specific credit situation.”A spokesperson for the French lender declined to say whether that provision was related to the Carriox loans, according to The Wall Street Journal.Where Is Brahmbhatt Now?According to people familiar with the matter, HPS has told some clients it believes Brahmbhatt is currently in India.Calls to his lawyer seeking comment on his client’s whereabouts were not immediately returned, The Wall Street Journal reported.Impact on BlackRock and Its FundsWhile the investment represents only a fraction of HPS’s $179 billion in assets under management, the case has nevertheless raised eyebrows across Wall Street.A person close to BlackRock said writing off the exposure will not materially affect fund returns this year. The person added that HPS had been collecting loan payments until earlier this year.Notably, Brahmbhatt had provided a personal guarantee on the loans but filed for personal bankruptcy on August 12, the same day his telecom companies entered Chapter 11.A Blow to the Private Credit BoomThe episode adds to growing concerns about the risks lurking in the booming private credit market, a $1.7 trillion industry where lenders operate outside the traditional banking system.For now, the alleged fraud stands as a reminder that even the world’s largest asset manager can be ensnared in elaborate deception when verification systems are circumvented.As lenders seek to recover the missing millions and trace assets across borders, the case underscores a hard truth: the hunt for high yields often carries hidden risks.
