CLIENT ALERT: SDNY & SEC Signal White Collar Enforcement Risks to the Private Credit Market

May 29, 2026

KEY TAKEAWAYS

The private credit market, an estimated $3 trillion industry in which non-bank lenders provide financing directly to companies, is facing a rise in federal enforcement activity and regulatory scrutiny.
The U.S. Attorney’s Office for the Southern District of New York (SDNY) recently brought criminal fraud charges against executives of two major private credit-backed companies, Tricolor Holdings and First Brands Group, both of which collapsed into bankruptcy in September 2025. SDNY is also apparently probing valuation practices at a major private credit fund.
SDNY U.S. Attorney Jay Clayton has warned that the Department of Justice is scrutinizing private credit valuation practices, including the mismarking of assets to generate fees.
Securities and Exchange Commission (SEC) Chairman Paul Atkins has also confirmed that the SEC is investigating allegations of fraud in the private credit markets.
Private credit participants, including fund managers, business development companies, and their portfolio companies, should take immediate steps to review valuation practices, compliance policies, and disclosure obligations.

THE SEPTEMBER 2025 BANKRUPTCIES: TRICOLOR AND FIRST BRANDS

Tricolor Holdings. In September 2025, Tricolor Holdings, LLC, a Dallas-based subprime auto retailer and financing company, filed for Chapter 7 bankruptcy. On December 17, 2025, SDNY unsealed an indictment charging Tricolor’s former CEO and former COO with bank and wire fraud and related conspiracy charges in connection with a years-long scheme to defraud Tricolor’s lenders, including private credit lenders. The indictment alleges defendants double-pledged collateral, such that by August 2025, Tricolor had pledged approximately $2.2 billion of collateral to lenders and investors but had only about $1.4 billion of actual collateral.

First Brands Group. Also in September 2025, First Brands Group, LLC, a global automotive aftermarket parts supplier that reported approximately $5 billion in net annual sales, filed for Chapter 11 bankruptcy. The company declared just $12 million in cash and over $9 billion in liabilities. On January 29, 2026, SDNY unsealed an indictment charging the company’s founder and former CEO and his brother (a former senior executive) with wire fraud, bank fraud, money laundering, and related conspiracy charges.

According to the indictment, from at least 2018 through 2025, the defendants submitted fraudulently inflated invoices, double and triple-pledged loan collateral, falsified corporate financial statements, and sold factoring partners (financing counterparties) billions of dollars of purported customer receivables that did not exist. The indictment also describes “round trip” transactions in which the company allegedly diverted funds from accounts payable financing to cover its own cash needs.

JPMorgan Chase CEO Jamie Dimon warned in October 2025 that the twin bankruptcies were signs that corporate lending practices had grown too lax, cautioning that “when you see one cockroach, there’s probably more.”

U.S. ATTORNEY JAY CLAYTON WARNS THE PRIVATE CREDIT SECTOR

SDNY U.S. Attorney Jay Clayton has made clear that private credit enforcement is a priority for his office. In a November 2025 interview, Clayton stated that there are “definitely some areas of concern” in private markets and that “people should know that the financial regulators and the department are looking at those.” Clayton specifically cautioned against fund managers cherry-picking valuations to inflate fees and added: “I expect we will have more to do in areas of our private markets.”

Clayton also flagged the risk of abuse when assets are transferred between portfolios, noting that an area “to watch out for is marks on assets with no trading when things are moved around from vehicle to vehicle,” and that “if someone is moving a position from Fund A to Fund B and if you can just name a price internally, the opportunity to pick a price that benefits the house over investors is pretty high.”

More recently, at a May 2026 Managed Funds Association conference, Clayton reiterated that “if people are mismarking in order to generate fees, that’s always been a no-no.”

Consistent with Clayton’s warning, it was recently reported that his office has been probing a major private credit fund that is also facing multiple class-action lawsuits filed by investors alleging that the fund made materially false statements and failed to properly value its loans.

SEC CONFIRMS PRIVATE CREDIT FRAUD INVESTIGATIONS

The private credit market has also caught the attention of the SEC. On May 4, 2026, SEC Chairman Paul Atkins confirmed at the Milken Institute Global Conference that the SEC, in coordination with the U.S. Treasury Department, is investigating allegations of fraud in the private credit market. Atkins noted that the SEC has “a special role to play, because [its] jurisdiction with respect to fraud and manipulation in the sale of securities extends to private markets[.]” Atkins warned that the SEC is “taking it seriously,” while adding that the agency does not currently view private credit as a “systemic risk.”

Then on May 13, 2026, in his first speech since being sworn in as the SEC Enforcement Director, David Woodcock stated that the Enforcement Division will “remain active” in the private funds space and will continue to “pursue matters involving misappropriated client assets, inadequate safeguarding of assets; misleading strategy disclosures; undisclosed fees and expenses; fraudulent valuations and mismarking; prohibited trading practices; and undisclosed conflicts of interest.”

PRACTICAL IMPLICATIONS

The convergence of criminal prosecutions, SEC investigations, DOJ probes, and high-profile collapses creates a new risk environment for private credit market participants. Companies and individuals should consider the following:

Private credit participants should review their valuation policies and procedures to ensure compliance with applicable accounting standards and fair value measurement requirements.
Valuation practices involving asset transfers between funds, continuation vehicles, or affiliated portfolios should be scrutinized for potential conflicts of interest.
Compliance programs should be updated to address the specific risks highlighted by recent enforcement actions, including double pledging of collateral, manipulation of borrowing base reports, and misrepresentation of financial condition to lenders.
Companies relying on private credit financing should ensure that their representations to lenders regarding collateral, financial statements, and borrowing base calculations are accurate and complete. The Tricolor and First Brands prosecutions demonstrate that executives who deceive lenders may face criminal liability.

CONCLUSION

The escalation of federal enforcement and regulatory activity targeting the private credit sector signals that private credit market participants should increase vigilance to confirm they are complying with the law. As with cryptocurrency and other rapidly growing financial sectors before it, the government’s message is clear: growth and innovation do not insulate market participants from the reach of existing fraud, securities, and financial reporting laws. Sher Tremonte LLP will continue to monitor developments. For questions, please contact us. Written by Brian Kidd, Alison Moe, Tami Stark, and Raphael Friedman.