The systems were there to catch them. No one used them.
In the aftermath of spectacular fraud collapses on both sides of the Atlantic, the private credit industry finds itself at a philosophical crossroads: whether the failures of a few represent a systemic failure of vigilance, or merely the acceptable casualties of a competitive market. Hundreds of millions in losses tied to phantom collateral and forged documents have forced lenders to confront an uncomfortable truth — the tools to detect deception existed all along, but the hunger for yield quietly made them optional. The divergence in how firms are now responding reveals not just different risk appetites, but different answers to a deeper question about what stewardship of capital actually requires.
- Two landmark fraud collapses — one involving fabricated telecom receivables in the US, another involving collateral pledged multiple times across UK property loans — have left a constellation of major financial institutions facing losses in the hundreds of millions.
- The industry's reaction has fractured along a fault line between complacency and alarm, with some firms treating the disasters as isolated anomalies while others have launched sweeping reviews of their entire existing portfolios.
- Competitive pressure to deploy capital had quietly eroded underwriting discipline over time, leaving lenders with contractual audit rights they almost never exercised — a system designed to catch fraud that chose, in practice, not to look.
- Regulators are now watching: the SEC has signaled scrutiny of private credit managers, transforming what was once optional due diligence into something closer to a legal and reputational imperative.
- Industry advisors are pushing for formalized fraud detection frameworks embedded at the earliest stages of deal-making, arguing that a documented playbook is no longer just prudent risk management but a necessary shield against regulatory exposure.
The private credit industry is fracturing over how to reckon with a wave of fraud that has cost lenders hundreds of millions of dollars. In the United States, BlackRock's HPS Investment Partners is pursuing more than half a billion in damages against telecom entrepreneur Bankim Brahmbhatt, whose companies collapsed into bankruptcy after allegedly pledging receivables that never existed — a deception sustained by forged invoices and fabricated customer emails, discovered only when an HPS employee noticed something suspicious about an email address. In the UK, Market Financial Solutions was pushed into administration after the same property was allegedly pledged as collateral against multiple loans simultaneously, drawing Barclays, HSBC, Santander, Apollo's Atlas SP Partners, Jefferies, and Elliott into potential losses running into the hundreds of millions.
The industry's response has been strikingly uneven. Some firms have absorbed the news and continued underwriting without meaningful change. Others have moved to enhanced due diligence on every new deal and conducted internal reviews of existing portfolios — examining not just financial statements but day-to-day operations, related-party transactions, and cash flow patterns. Nathan Hein of FTI Consulting's Risk & Investigations team has observed this divergence firsthand, noting that most managers have reviewed at least some portion of their holdings, though whether this becomes standard practice or fades with the immediate shock remains an open question.
Hein argues the industry must embed fraud detection into the earliest stages of deal-making rather than waiting for late-stage red flags. A formal framework, he contends, is no longer just sound risk management — it is becoming a regulatory necessity, as the SEC has signaled it is scrutinizing private credit managers. The deeper indictment, however, comes from compliance advisors who point to competitive capital deployment pressures as the root cause: lenders chased yield into riskier credits without physically verifying the collateral backing those loans. Audit rights existed in virtually every credit agreement. They were simply never used. The industry built a system capable of catching fraud, then chose not to activate it — and is now confronting what that choice cost.
The private credit industry is fracturing over how to respond to a wave of fraud that has left lenders holding hundreds of millions in losses. On one side of the Atlantic, BlackRock's HPS Investment Partners is pursuing more than half a billion dollars in damages tied to telecom entrepreneur Bankim Brahmbhatt, whose companies Broadband Telecom and Bridgevoice collapsed into Chapter 11 bankruptcy in August. Court filings allege the businesses pledged receivables that never existed, backed by forged invoices and fabricated customer emails—a deception that only surfaced when an HPS employee noticed something wrong with a customer's email address. Across the ocean, the UK's Market Financial Solutions was pushed into administration in late February after allegations emerged that the same property had been pledged as collateral against multiple loans. The lender's exposure rippled through the banking world: Barclays, HSBC, Santander, Apollo's Atlas SP Partners, Jeffries, and Elliott all face potential losses running into the hundreds of millions.
Yet the industry's response to these catastrophes has been strikingly uneven. Some private credit firms have treated the collapses as isolated incidents and continued with their standard underwriting practices unchanged. Others have swung in the opposite direction, implementing enhanced due diligence on every single new deal. Nathan Hein, a Senior Managing Director on FTI Consulting's Risk & Investigations team, has watched this divergence firsthand as firms grapple with fraud risk. The spectrum of responses ranges from business-as-usual to what Hein describes as wholesale portfolio reviews—the kind that dig into financial processes, examine day-to-day operations beyond the numbers, scrutinize related-party transactions, and trace cash flows through the business.
What's striking is that the portfolio reviews aren't limited to new deals. Most managers Hein has spoken with have conducted some form of internal review of their existing holdings, typically examining companies where they already understand the risk profile. The question now is whether these reviews will become standard practice or fade once the immediate shock of the collapses wears off.
Hein argues that the industry needs to formalize its approach to fraud detection from the very beginning of a deal, rather than waiting for late-stage warning signs to emerge. A documented framework isn't just good risk management—it's becoming a regulatory necessity. The Securities and Exchange Commission has signaled it is scrutinizing certain private credit firms, and having a formal playbook for assessing and addressing fraud risk provides what Hein calls "incredibly helpful" protection from both a defense and risk mitigation standpoint.
The deeper problem, according to one expert who advises firms on regulatory compliance, is that competitive pressure to deploy capital has gradually worn away underwriting standards. Lenders have chased higher-yielding borrowers without bothering to physically verify what actually backs the loan. The tools to catch fraud exist—virtually every credit agreement includes audit rights—but they're rarely used, even on the riskiest credits where on-the-ground checks of collateral, office space, and headcount would most likely surface a problem. The industry built a system that could catch fraud but chose not to use it, and now it's paying the price.
Citações Notáveis
Once you assess the risk you have a formal playbook for how you address it during the diligence.— Nathan Hein, Senior Managing Director, FTI Consulting Risk & Investigations
Audit rights are written into virtually every credit agreement but are rarely exercised, even on the riskier credits.— Regulatory compliance expert cited in the reporting
A Conversa do Hearth Outra perspectiva sobre a história
Why are some firms treating these collapses as one-offs while others are overhauling everything?
It comes down to how you interpret risk. If you see Brahmbhatt and Market Financial Solutions as anomalies—bad actors in an otherwise sound system—you keep doing what you've always done. If you see them as symptoms of a broken process, you rebuild from scratch.
But they're not really anomalies, are they? The fraud was pretty elaborate.
No, they weren't. That's the unsettling part. These weren't sophisticated schemes that fooled everyone. They were caught by accident—an email address that looked wrong, a property pledged twice. The systems were there to catch them. No one used them.
So the audit rights exist but lenders just don't exercise them?
Exactly. They're written into every contract. But actually flying to a borrower's office, checking their inventory, counting their employees—that takes time and money. When you're competing to deploy capital fast, you skip it.
Is the SEC pressure going to change that?
It might. A documented fraud assessment framework is becoming a regulatory shield now, not just a risk tool. That changes the calculus. Suddenly it's not just about catching fraud—it's about proving you tried to.
What does a real framework look like?
It starts on day one, not day 100. You assess fraud risk upfront, then you have a playbook for how you actually investigate during due diligence. You look at the financials, yes, but also the operations—who works there, what do they actually do, how does money move. You trace related-party transactions. You verify collateral physically.
And the firms that are doing this now—are they the ones that will survive the next crisis?
They're the ones that will at least be able to explain themselves when it comes.