US bankruptcy watchdog wants independent probe of First Brands

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First Brands already investigating $2.3 billion in missing funds

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US Trustee says examiner will provide transparency, credibility

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Creditor Raistone previously called for an examiner appointment

By Dietrich Knauth

NEW YORK, Oct 16 (Reuters) - The U.S. government's bankruptcy watchdog has asked a judge to appoint an independent examiner to investigate First Brands, saying the auto part maker's creditors needed an impartial account of the company's collapse, which has rattled debt investors in recent weeks.

The Office of the U.S. Trustee, a part of the U.S. Department of Justice which oversees bankruptcy matters, said in a court filing on Wednesday that there are "ample grounds to suspect that current members of the debtors' boards or executive management team may have engaged in actual fraud, dishonesty, or criminal conduct in the management of the debtors’ business affairs."

First Brands filed for bankruptcy protection in September after its lenders began investigating irregularities in the company's financial reporting, and one of its creditors, trade finance company Raistone, later said $2.3 billion had "simply vanished" from the company's books. The company has $11.6 billion in total liabilities, according to the court documents.

The U.S. Trustee urged U.S. Bankruptcy Judge Chris Lopez in Houston, who is overseeing First Brands' bankruptcy, to expedite the appointment of an examiner and make a ruling by October 29. Lopez has currently scheduled a November 17 hearing on an earlier demand for an examiner from Raistone.

First Brands did not immediately respond to a request for comment.

Its bankruptcy has sent ripples through credit markets in recent weeks, casting a spotlight on the exposure of some of the world's top financial institutions. The company's CEO, Patrick James, stepped down from his position earlier this week.

SPECIAL COMMITTEE PROBING FINANCING IRREGULARITIES

First Brands has appointed a special committee of independent directors to probe irregularities in its use of third-party factoring arrangements, which the company has used to generate short-term cash flow.

First Brands sold invoices to third-party financial institutions, allowing it to collect funds before a customer actually paid, and the company is investigating whether it double-sold some invoices to more than one buyer, and whether First Brands held on to some customer payments that should have been turned over to the purchaser of an invoice.

The U.S. Trustee said that the investigation would be better handled by an independent examiner, who would provide more credibility than company insiders who may be implicated in fraud or mismanagement. An examiner would also publicly report his or her findings, something which the First Brands' board is not required to do, according to the U.S. Trustee.

Bankruptcy examiners are commonly appointed in cases where a company's management is suspected of fraud, as in the cases of collapsed crypto firms Celsius and FTX. (Reporting by Dietrich Knauth, Editing by Alexia Garamfalvi and Diane Craft)