The Tricolor Collapse Is a $1.9 Billion Reminder: Due Diligence Is More Than a Checklist

On August 18, 2026, the SEC charged three former executives of Tricolor Holdings, a Texas-based subprime auto lender, with fraud in connection with what the agency describes as a multi-year scheme involving more than $1.9 billion of asset-backed securities offerings.

The allegations are dramatic: hundreds of millions of dollars of auto loans allegedly pledged as collateral more than once, manipulated loan performance data, misleading representations about the company’s financial condition, and more than $945 million in principal still outstanding when Tricolor filed for bankruptcy.

But for those of us working in investment banking, the more useful takeaway isn’t simply that another financial company allegedly committed fraud. It’s what the case says about due diligence — and the limitations of treating diligence as a checklist rather than an exercise in understanding a business.

What the SEC Says Happened

According to the ⁠SEC’s August 18 complaint and announcement, Tricolor raised more than $1.9 billion through asset-backed securities offerings between at least 2020 and its bankruptcy in September 2025. The SEC alleges that former CEO Daniel Chu, former CFO Jerome Kollar and former Senior Director of Finance Ameryn Seibold participated in a scheme in which auto loans were pledged to multiple lenders or securitizations. Offering materials allegedly represented that loans included in collateral pools were free and clear of other liens even though company executives knew that many had already been — or soon would be — pledged elsewhere.

The SEC also alleges that Tricolor manipulated loan metrics so that delinquent or defaulted loans appeared current and therefore eligible for securitization. Meanwhile, according to the complaint, the company portrayed itself to investors as financially sound while executives knew it was experiencing significant liquidity constraints and struggling to fund operations. These remain allegations, and the defendants are entitled to contest them. But the case provides an unusually stark illustration of a problem that can arise in virtually any securities transaction: what happens when the information being diligenced is itself unreliable?

Due Diligence Can’t Mean “We Asked for the Documents”

Broker-dealers and investment bankers routinely conduct diligence by requesting financial statements, capitalization information, material agreements, litigation disclosures, background information and other documentation. That’s important.

We previously published a whole post about FINRA's 2026 Annual Regulatory Oversight Report and its focus on private placement diligence. But possession of a diligence file doesn’t necessarily mean that meaningful diligence occurred. The Tricolor allegations illustrate why.

If collateral was represented as unencumbered when it was actually pledged elsewhere, reviewing a schedule showing the collateral may not have been enough. If delinquent loans were manipulated to appear current, reviewing company-generated performance reports may not have been enough. If management represented that liquidity was adequate while internally struggling to fund operations, relying exclusively on management’s characterization of the business may not have been enough.

Good diligence therefore involves more than asking:

Did we receive the information?

It also requires asking:

Does the information make sense?

And, where the risks warrant it:

Can important information be independently corroborated?

This Isn’t Just a Lesson for ABS Underwriters

Tricolor involved asset-backed securities and private credit, but the diligence lesson extends well beyond structured finance. It’s particularly relevant to private placement agents.

A placement agent helping an issuer raise growth capital may receive financial statements, forecasts, capitalization tables, customer information, use-of-proceeds descriptions and management representations. Those materials often form the basis for investor conversations and offering materials. The fact that an issuer provided the information doesn’t necessarily end the inquiry.

Where numbers don’t reconcile, assumptions appear unusually aggressive, representations conflict with other information, significant liabilities are poorly explained, or management resists reasonable diligence requests, those issues deserve attention before information is passed along to investors.

The SEC has long emphasized the importance of reasonable investigation when broker-dealers recommend securities. In the private markets — where investors often have substantially less publicly available information — that gatekeeping function can be particularly important.

M&A Bankers Should Pay Attention Too

The same principle applies in mergers and acquisitions. The regulatory framework can differ substantially from a capital raise, but that doesn’t make diligence irrelevant. Sell-side bankers routinely communicate information concerning:

• Revenue and EBITDA

• Customer concentration

• Working capital

• Outstanding debt

• Ownership and capitalization

• Litigation and regulatory matters

• Forecasts and management adjustments

• Material contracts

• Other information affecting valuation

  
  

A banker isn’t expected to audit the company, but there’s an important difference between not independently auditing every representation and ignoring information that doesn’t make sense.

If financial results don’t reconcile with supporting materials, EBITDA adjustments keep changing, management representations contradict documents in the data room, ownership isn’t clear, or significant liabilities emerge without a credible explanation, those are not simply problems for the buyer to discover later.

They’re diligence issues.

For independent M&A professionals in particular, reputation is one of the most valuable assets they have. Passing along information that later proves materially inaccurate can damage a transaction, a client relationship and the banker’s credibility — even where the banker wasn’t responsible for creating the information.

Look for Inconsistencies, Not Just Missing Documents

Some of the most important diligence findings don’t come from discovering a missing document. They come from discovering that two pieces of information don’t agree.

A few examples:

• Financial statements don’t reconcile with management presentations.

• Revenue numbers differ between materials provided to investors and internal reporting.

• Cap table information conflicts with organizational documents.

• Debt schedules don’t match UCC filings or other available records.

• Customer concentration data doesn’t align with reported revenue.

• Use-of-proceeds explanations change during the transaction.

• Background checks reveal litigation, regulatory matters or affiliations that weren’t disclosed.

• Management repeatedly delays or avoids straightforward diligence requests.

None of these automatically means fraud. But they are reasons to ask another question. And sometimes the most valuable diligence question is simply: Why?

Independent Verification Matters Most Where the Risk Is Highest

Not every representation needs third-party verification. Transaction professionals have to apply judgment. But the more material a representation is to the investment thesis or transaction valuation, the stronger the case for corroborating it. Depending on the transaction, that might mean reviewing organizational documents, lien searches, UCC filings, litigation records, regulatory databases, ownership records, customer documentation, bank information, third-party financial reports or other independent sources. It can also mean something much simpler: comparing information provided at different stages of the transaction and investigating inconsistencies.

Technology has made collecting diligence materials easier than ever. But it has not eliminated the need for professional skepticism.

Document the Questions — Not Just the Answers

There’s another practical lesson here for broker-dealers and independent bankers: a good diligence record should demonstrate more than the existence of a folder containing documents. It should help show what was reviewed, what questions arose, how those questions were addressed and why the transaction ultimately moved forward.

That doesn’t mean creating unnecessary paperwork for every deal. It means preserving evidence of the judgment that was actually exercised. If something looks unusual and the banker asks management about it, documenting the question and response may ultimately be far more meaningful than documenting that another standard diligence item was received.

The Takeaway for Independent Investment Bankers

Fraud is intentionally difficult to uncover. No reasonable diligence process can guarantee that a determined bad actor won’t deceive investors, lenders, buyers or bankers. That isn’t the standard. The more practical question is whether transaction professionals respond appropriately to the information available to them.

For private placement agents, that means understanding the issuer and the securities they’re helping place rather than simply forwarding management’s materials to investors.

For M&A bankers, it means recognizing when information being presented to potential buyers doesn’t reconcile or raises questions that should be addressed.

And for broker-dealers supervising both types of activity, it means having diligence processes that leave room for judgment rather than reducing every transaction to the same checklist.

The Tricolor allegations are extreme. The lesson is not.

Due diligence isn’t about proving that nothing could possibly be wrong. It’s about asking enough of the right questions that, when something doesn’t add up, you don’t simply look the other way.

At Britehorn Securities, we work with experienced independent investment bankers, M&A advisors and private placement professionals who want the regulatory infrastructure and broker-dealer support to pursue transactions the right way — without sacrificing their independence. From transaction diligence and regulatory guidance to deal execution and compliance support, our platform is built around the realities of independent investment banking. If you’re an investment banking professional looking for a broker-dealer partner that understands your business, ⁠contact Britehorn Securities to learn more about joining our platform.