Federal prosecutors have charged Daniel Chu, founder of bankrupt subprime auto lender Tricolor Holdings, with orchestrating a wide-ranging scheme to defraud lenders and investors, marking a dramatic escalation in one of the most closely watched collapses in the asset-backed securities market this year.

DOJ Alleges “Systemic Fraud” at the Top

According to an indictment unsealed by the U.S. Department of Justice, Chu and senior executives allegedly operated Tricolor through what prosecutors described as “systemic fraud.” The charges claim that misconduct was not isolated or incidental, but instead directed from the highest levels of the company. Tricolor filed for bankruptcy in September after shuttering more than 60 locations across the US Southwest, leaving lenders exposed to significant losses.

Manhattan U.S. Attorney Jay Clayton said the company misled multiple lenders through repeated and deliberate misrepresentations. “They told multiple lies and most disturbingly the direction to do it came from the top,” Clayton said at a press conference.

Double-Pledged Collateral and Inflated Asset Values

Prosecutors allege that Tricolor executives, acting at Chu’s direction, engaged in practices such as double-pledging the same collateral across multiple warehouse credit facilities and manipulating asset descriptions to make low-quality or ineligible loans appear to meet lender requirements. Loans that were delinquent, charged off, or previously sold were allegedly still reported as eligible collateral.

By September 2025, Tricolor had pledged approximately $2.2 billion in assets to lenders, while internal records showed only about $1.4 billion in real, qualifying collateral. Lenders including JPMorgan Chase, Barclays, and Fifth Third Bancorp have been preparing for sizable losses linked to the company’s collapse.

Guilty Pleas and Broader Market Fallout

Chu and former chief operating officer David Goodgame face charges including operating a continuing financial crimes enterprise, which carries a potential sentence of up to 10 years in prison. Federal prosecutors also charged other former officials, including Jerome Kollar and Ameryn Seibold, both of whom have pleaded guilty, according to the FBI.

The case has sent ripples through the asset-backed securities market, where investor confidence depends heavily on accurate loan-level reporting. Tricolor had portrayed itself as a data-driven lender with advanced underwriting analytics, making its loan pools attractive for securitization. The allegations now raise broader concerns about due diligence, risk controls, and governance standards in subprime auto finance.