WHAT THE...FRAUD?

Or: What if the collateral isn’t there at all?

Two years ago, we posted on LinkedIn about the Dodgeball Market: “This is a golden age of fraud. Bubbles tend to attract financial shenanigans and we are starting to see the fallout of this.”

While the prospect of defaults may be scary for credit investors, the idea of fraud is downright terrifying.

Fraud introduces a level of binary risk that is deeply uncomfortable. Credit is asymmetric and recovery is the most important thing. We are in the late stages of the cycle. Any credit platform built for what is ahead needs a plan to manage this risk. That is why we write about it here.

Asset-backed finance is structurally better equipped to detect fraud than almost any other form of lending. If your repayment depends on a specific pool of identifiable assets, you have both the right and the reason to verify the existence of those assets. Borrowing base certificates, field exams, independent valuations: they are not administrative burdens but fraud detection tools. Problems occur when they are not used properly.

This issue examines how fraud manifests in ABF, what the most common patterns look like, and what effective prevention requires. We then speak with Scott Fuller, who spent more than twenty-five years in asset-based lending, most recently as Managing Director and Head of Valuations and Corporate Recovery for EMEA at Gordon Brothers, where he oversaw the valuation and recovery of distressed asset portfolios across the UK and Europe.

A note on intent: We write the Credit Observer to sharpen our own thinking and to hold ourselves accountable to the standards we set. This article is not a criticism of any specific sector or investment strategy. It is merely a reminder that in times of abundant capital it is easy to get carried away. We welcome feedback and the debate.

 Three Flavours of Fraud

All performing loans look alike. Each fraud is fraudulent in its own way. We identify three distinct patterns to help you navigate the risk.

The first is phantom collateral. Assets that are reported but do not exist. In receivables financing, invoices raised against transactions that never occurred. In property lending, the same asset used as collateral for multiple separate loans simultaneously. The borrowing base reflects fiction not reality.

Market Financial Solutions entered administration in February 2026 with a reported collateral shortfall of as much as £930 million. MFS was a Mayfair-based bridging lender. The firm claimed a portfolio of £2.4 billion and the ability to deliver loans of up to £50 million in just three days.

Court filings highlighted serious concerns around mismanagement, banking irregularities, potential double pledging of properties securing loans, and a significant shortfall in group collateral. Double pledging is exactly what it sounds like. The same property used as security for two or more separate loans from different lenders.

Creditor allegations describe a refinancing merry-go-round, with a web of entities created to house loans secured using MFS’s loan book as collateral. There are also allegations that companies supposedly acting as genuine borrowers were actually closely connected to the owner, and that some directors and shareholders of corporate borrowers also held positions at MFS’s accountants. Students of the Wirecard scandal will recognise the pattern: a network of interconnected entities, shared directors, and structures designed to create the appearance of independence.

The lesson is not that lenders were naive. Double pledging, by design, is structured to survive standard bilateral diligence. No single lender sees enough of the picture to catch it alone.

At its most extreme, phantom collateral becomes a collateral Ponzi scheme: new facilities raised to service existing ones with assets continuously recycled across structures – until the music stops.

Across the Atlantic, First Brands Group illustrated the same pattern in receivables and inventory finance. The defendants, indicted on federal fraud charges in January 2026, perpetrated multiple schemes to fake and falsely inflate invoices, double and triple pledge loan collateral, falsify financial statements, and conceal substantial liabilities from lenders.

One lender we spoke to asked to independently verify a sample of invoices by contacting the underlying debtors directly. Instead of complying with the request, the CFO shouted at him for disrupting the potential financing late in the game. That lender dodged a bullet.

The second pattern is collateral inflation. Assets exist but are systematically overvalued. In Issue 2, Loan-to-Whatever-You-Want, we examined how valuation methodology can be stretched to justify almost any advance rate if the underlying assumptions go unchallenged. The same principle applies to a manipulated borrowing base in a platform facility.

What does that mean in practice? A manufacturer reports £40 million of eligible inventory. The advance rate looks conservative at 70 percent. The lender extends £28 million. What the lender may not know is that £15 million of that inventory is slow-moving stock that has been sitting in the same warehouse for eighteen months, that a further £8 million is finished goods for a customer whose orders have quietly stopped, and that the NOLV on the remainder is materially below cost. The 70 percent advance rate, applied to an inflated denominator, offers far less protection than it appears.

This pattern does not always involve deliberate fraud. Sometimes it is wishful thinking. The net result for the lender is often the same.

A subtler variant is delayed credit note recognition. A customer returns goods or disputes an invoice. The borrower delays notification. The receivable stays in the borrowing base at full value while the actual collateral has already been replaced.

The third pattern is structural manipulation. The asset exists, is even valued appropriately, but the structure around it has been engineered to jeopardise the lenders’ rights and recovery prospects.

Structural manipulation is the most sophisticated of the three. The asset exists. The security is real. You just cannot get to it when it matters. Opaque entity structures, related-party flows, and undisclosed intercreditor arrangements ensure that by the time you try to enforce, your rights merely exist in theory.

The MFS creditor allegations, with supposed borrowers connected to the owner and accountants holding positions in both camps, sit squarely in this category.

What Creates Conditions for Fraud

Fraud usually requires a trigger and a "supportive" environment.

The trigger is often financial stress. A borrower who is over-leveraged, trading poorly, or facing a liquidity event does not wake up one morning and decide to commit fraud. It starts with a small misrepresentation to buy time. Then another. External pressure (tight reporting deadlines, stakeholder expectations, covenant tests, the need to deliver a "good news" story to the board or to employees) pushes the C-suite towards increasingly irrational decisions. By the time it becomes systemic, it is too late to reverse course.

The "supportive" environment is one with weak internal governance. Fraud is very rarely a one-person creation. It requires a culture where challenge is absent. If the CFO never pushes back on the CEO, the board has no independent voice, internal control weaknesses flagged by auditors go unaddressed, the conditions are rife. If a CFO shouts at a lender requesting basic documentary evidence, it tells you everything about the culture above and around him.

Lenders who learn to read the interpersonal dynamics of a management team (who challenges whom, who defers, who controls the information flow) will often catch problems earlier than borrowing base certificates will.

The ABF Dichotomy

ABF is simultaneously more exposed to fraud and better equipped to detect it. The loan sits closer to the collateral. You know the assets, you have the documentation, and you have the right to verify anytime, anywhere. And yet that proximity can breed complacency. Trust, but verify.

Anyone who loves reading fraud books like we do will recognise this dynamic. The red flags are almost always there: in silos, visible to individuals who lack the full picture. By the time someone assembles the complete puzzle, the damage is done.

Both MFS and First Brands involved large platforms with multiple lenders operating in silos. Each lender conducted its own diligence. Each monitored its own position. None had a complete picture of the whole. The only one who saw the full chess board and got up and went to bed every day scheming how to keep it hidden was the borrower.

This is the multi-lender fragmentation problem. A borrower with twelve lenders knows exactly what each one can and cannot see. It knows which lender is more rigorous and which is less. It can manage information asymmetry strategically. The lenders, isolated in individual bilateral relationships, cannot do the same.

There is also a cultural problem. Fraud prevention requires scepticism, and scepticism sits in tension with the relationship dynamics of private credit. A lender who insists on independently verifying every charge, who demands live data feeds from the originator’s systems, who requires audit rights with no notice period, is not as easy to do business with. Deployment pressure increases fraud risk.

Paula Laird, Partner at Squire Patton Boggs and specialist in asset-based lending transactions, adds her own perspective: “The legal documentation process is fundamental to governance quality. We often see this negotiated during the term sheet or documentation phase, when lenders are keen to win the deal. Fundamental controls such as debtor verification by an independent third party, the right to physical audits, not only on a scheduled basis or an event of default, but most importantly when the lender suspects there has been an event of default, should not be given away lightly.”

 What Good Prevention Actually Looks Like

It requires discipline, some operational intensity, and a culture that treats independent verification as a habitual feature of the ongoing credit relationship.

Independent valuation is the foundation. For property, a qualified surveyor applying appropriate disposal assumptions. For inventory, Net Orderly Liquidation Value assessed by a specialist with the data, experience and market relationships to execute a sale under pressure. For equipment, someone who has physically inspected the assets, confirmed their location, and can attest to their condition and saleable value.

During his time at Gordon Brothers, Scott Fuller led a team with access to a database of over ten million asset sale values across retail, industrial, and commercial categories. That kind of data is incredibly valuable in determining NOLVs in real life.

Independent title and lien verification is non-negotiable. Before extending any facility, establish independently that the security you are taking is what you think it is, that no prior undisclosed charges exist, and that the asset is not simultaneously pledged elsewhere.

Technology is changing what is possible. Dickon Johnstone, founder and CEO of Themis, has spent seven years building AI-powered tools to detect financial crime. Themis recently acquired Pasabi, an AI fraud monitoring platform that deploys agents to scan continuously for suspicious activity across counterparty networks. Live data integration, direct API access to originator systems, automated borrowing base calculation, and AI-powered anomaly detection are available today.

"Most private credit frauds are not technically novel. They rely on the same patterns of opaque ownership, related-party flow and selective disclosure that have been visible in every major case from Wirecard to MFS. What's new is that AI-driven network mapping and continuous monitoring can now surface those patterns at speed and scale - turning fraud detection from a post-mortem exercise into a preventative one" - Dickon Johnstone

At VCS, we focus on smaller platforms that typically have one primary institutional lender. That is a deliberate underwriting preference. When we are the sole or lead institutional lender, we have visibility across the full capital structure. A platform managing twelve bilateral relationships, feeding each a partial picture, is a platform where the conditions for fraud are structurally much more present.

One thing to clarify: VCS provides transitional capital to help platforms scale. The governance frameworks we put in place, the verification standards we require, the reporting we insist on: these are what transform a specialist lender into an institutionally fundable business. Platforms that do this properly access cheaper capital on the other side. Done well, structural discipline is good for everyone.

Finally: go and look. Not once at origination. Regularly, unannounced, and with genuine scepticism. When a borrower refuses a request to independently verify invoices by contacting debtors directly, you have your answer.

SEVEN QUESTIONS FOR: SCOTT FULLER

Former Managing Director, Head of Valuations and Corporate Recovery EMEA, Gordon Brothers

Scott Fuller spent more than twenty-five years in asset-based lending. He began as a lender at HSBC and Royal Bank of Scotland, where he underwrote and syndicated some of the largest ABL facilities in the UK. He subsequently led European Valuations and Corporate Recovery at Gordon Brothers, working alongside administrators, insolvency practitioners, and lenders navigating complex workout situations across the UK and Europe.

Vertis: You spent years on both sides of the ABL market: as a lender and then as a valuation and recovery specialist. When you walked into a distressed situation, what were the most common assumptions of lenders that did not hold up when faced with reality?

Fuller: One of the most common assumptions is that the assets declared in the company records not only exist, but they are current, sellable, in good working order, covered by your security net and stored correctly. One of the most fundamental disciplines in ABF is to know where your assets are located. You would be surprised how many times that inventory is not where the lender thought it was or that the machinery declared in the asset list as fully working had been stripped for parts or long since sold.  

Fear and denial exacerbate the issue. Focus on loan income, relationships, and competition have led to a reluctance to have the direct conversations or undertake the asset verification needed. Loans in part are built on trust, but that trust needs to work both ways. Red flags are missed and not addressed. Fraud, once started, is only going to get worse. It’s human nature to think that you couldn’t possibly be caught out, that your strong relationship with management means they wouldn’t defraud you. As things start to unravel, assumptions move from reality to “hope” value. The assets must be there and in good condition. Cash in the bank account will stay in place, they won’t make intercompany payments or move assets to group companies outside my security or control. You assume that inventory that hasn’t sold for years will magically sell at high prices and that aged or disputed invoices will suddenly get paid because you need them to cover your exposure. Machinery seen mothballed and rusty outside suddenly will become a fully working asset with the same value as that held in your borrowing base from an 18-month-old valuation.

Recovery value of assets becomes time critical in fraud and distress. Fear and denial prevent escalation; people don’t want to report to their credit teams / investors or declare provisions. People delay the verification and control until it’s too late because they don’t want to hear bad news.

Once fraud is suspected or uncovered it needs to be dealt with immediately – fraudsters act irrationally once they realise, you’re on to them.  You need to move quickly to make sure you protect the remaining asset value. Too many lenders wait, thinking it will get better and believe the story being sold to them by management. There is well-known saying “First loss is best loss”. It’s important you get physical control of the remaining assets and cash as quickly as possible to maximise recovery value.

Vertis: Inventory fraud, phantom stock, inflated book values, collateral pledged to multiple lenders: these are recurring themes in ABF workouts. What are the easiest checks that you have seen people miss to detect fraud?

Fuller: There are several simple unintrusive checks that a lender can and should be undertaking monthly without needing to disturb the borrower. Monitoring debt-turn and dilution, cash received vs. invoices less dilution, inventory turn and slow-moving inventory, concentration, aged debtors, undertaking a regular review of top customers and suppliers. Are they consistent, do they make sense, do they match the debtor receipts through the bank account. A change in trends should trigger more detailed conversations with the borrower.   

Lenders should be getting periodic copies of invoices and the proof of delivery behind them – complete spot checks - get selected remittance advices to show that there is a debtor relationship and receipts are paying off real invoices, not just round amounts. These are easy things for a good borrower to provide.

The most common miss and the easiest to fix is a recent problem stemming from the COVID pandemic. Some lenders are still seemingly reluctant to conduct regular on site in person visits. Lenders have become used to undertaking management reviews online and undertake field exams remotely to save costs.

Nothing beats an in-person walk of the factory and eyeballing of the business and management team. Ask to see your inventory. See the M&E working. Ask questions. Keep notes and compare against previous visits. Is the factory clean and well organised or is inventory sitting in boxes covered in dust and stored badly (are the boxes empty). Is the inventory onsite or stored in other warehouses or on consignment. Is only one of the four production lines working, parts being cannibalised.  Check some serial numbers against the fixed asset register. Speak to the production or operations managers not just the CFO. 

Vertis: The MFS collapse in February 2026 has put double pledging back at the top of the agenda in UK property lending. In your experience, how common is it to discover in a workout that the security a lender believed it held had already been granted to someone else? How does it differ by collateral type?

Fuller: It does happen. A lender should be checking the land registry and companies house for prior charges. Your lawyer should be able to provide specific advice in each jurisdiction and help identify prior or higher-ranking security. In the UK a debenture of fixed chattels charge would be registered and can be checked online. In wider Europe pledges over specific assets get registered. Checking that prior charges have been satisfied should be part of the closing conditions.  Check property site plans and your legal documentation match and that you have unfettered access to your property / assets. Inventory and Receivables are interlinked so if lenders are funding different assets or there are multiple charges having rights outlined in a deed of priority document is key. A security review should form part of a lenders standard annual business review to ensure no new charges have been registered.

Take Arena TV. A prominent outside Broadcaster working with SKY, BBC Premier League Football and Glastonbury. The business revenue was c£30m but outstanding debt on insolvency was in the region of £285 million to over 55 different lenders. The same assets were pledged multiple times using fabricated serial numbers. On insolvency only 66 items out of 8,196 listed in the company asset register were verified.     

Many lenders didn’t undertake any verification of the collateral and were put off by company claims that assets couldn’t be inspected because they were on hire. They relied solely on the companies fixed asset register and didn’t look to see what other charges were outstanding. Lenders didn’t know the extent or existence of the other lenders or true financial liabilities of the business.

This fraud developed over many years before finally being detected during a field exam. The examiner, unable to find a particular asset, attempted to instead verify a serial number with the equipment manufacturer. As it turned out, the serial number didn’t exist, and it turned out the equipment manufacturer had never made the equipment.  

Receivables and machinery are the most common assets to be double pledged; it is important to undertake regular monitoring to ensure your charge remains enforceable. The most common preventative measures to mitigate fraud are to take cash dominion and monitor receipts for receivables, and get the M&E equipment plated to highlight your fixed charge security. A lender should always make sure it has seen the assets and checked serial numbers through spot checks before advancing funds and conduct periodic reviews.

Vertis: In your career overseeing distressed asset valuations, how often did independent NOLV analysis on inventory or equipment produce a materially different number from what the lender had on their borrowing base? What typically drove the gap?

Fuller: Usually this occurs when little in-life monitoring has been undertaken. Too often things are left to annual valuation, or monitoring starts for a few months after loan close but gets forgotten about later as the lender moves onto its next new deal. No monitoring or adjustments get made to changing inventory levels or debtor and inventory turn. No adjustment for reducing gross margin or change in customer profile. Some reserves are left for annual valuations rather than adjusted monthly. Receivables and inventory assets are fast moving and typically turn within 90-120 days. The assets you look at today will not be the same three months from now and need to be regularly updated and reviewed. A business in distress will sell what they can for what they can, leaving older undesirable inventory, gaps in delivery and more disputed invoices. Maintenance of M&E reduces, and machines left idle increased depreciation in value. There are several things that can impact on asset value, and a valuer always provides a list of the key items recommending appropriate monitoring and frequency within its report. Many lenders just look at the NOLV and not the recommendations within it. When the highlighted trends change, the asset value should be reappraised and suitable adjustments made to the borrowing base. It reflects the business changing and the asset value with it. It’s when the assets are not monitored and reliance is simply placed on an annual valuation rather than reflecting the differing asset profile that drives the biggest value gaps.

Vertis: Both MFS and First Brands involved large platforms with multiple lenders operating in silos, each with a partial picture of the whole. Smaller platforms with a single institutional lender have a fundamentally different risk profile. In your experience across both types of situation, does that distinction bear out in practice?

Fuller: It does. Group companies with numerous but separate lenders pose a higher fraud risk because of the multiple layers of obfuscation. It allows a dishonest borrower to hide true financial performance, manipulate collateral and hide debt. It provides an easier path to double or triple pledge invoices, inventory and machinery, potential manipulation of intercompany transactions to inflate asset values and cash washing between facilities. If they have a group finance function, why are they operating multiple independent lenders rather than a club or syndicated facility? There may be perfectly good reasons why a business is structured in such a way, but the potential risk should be mitigated with better and more intensive asset due diligence.

Vertis: There is a structural tension in ABF between the need for rigorous independent verification and the competitive pressure to close deals quickly. How has the market changed over the last 5 years?

Fuller: The market has become more accepting and sees ABF as a real alternative to RCF and cashflow lending. Weeks would be spent on financial DD with no thought over asset value – then when a cashflow loan didn’t generate enough liquidity, thoughts would turn to assets but with no time left to undertake proper asset DD. More Asset DD is being instructed coterminously with the financial DD giving borrowers much more flexibility and choice over the final funding solution.

Lenders and advisors are also evolving. Not every penny is typically needed on day one. Valuers are being instructed to undertake two phase valuations, phase one being a high-level desktop range of values with phase two final values and asset inspection being undertaken later. Lenders are taking a more proactive view with a deemed borrowing base at lower advance rates based on the phase one range allowing for a transaction to be closed much quicker. Advance rates are then adjusted following phase two when final values including asset inspection have been undertaken. 

Technology is also playing a key role. Advances in AI and access to worldwide asset database values help give real time information. Independent valuation companies have a wide range of prior experience and improvements in technology means that they can quickly provide comparable asset values. Larger valuation companies such as Gordon Brothers and Hilco have grown their global disposition teams. Teams who are buying and selling assets daily and can provide real-time real-world experience on values, not just theoretical numbers.

Technology is also increasing the speed at which field exams can be completed, with information shared between borrower, advisor and lender through shared data rooms.

Vertis: If you could give one piece of advice to ABF lenders, what would it be?

Fuller: In life ongoing monitoring is key to a successful ABF. So much attention is put into the front end that it gets forgotten that a business changes over time. Make the monitoring relevant to the risk profile and monitor business trends regularly. 

Good monitoring doesn’t need to be intrusive. It can be simple and completed in house. A good business will already have the necessary books and records to hand and be ready to share. With good communication a business will understand and welcome questions over changing trends and financial performance and understand that if monitoring metrics deteriorate that more verification / review will be required and has less argument not to allow the enhanced verification of assets.

Don’t ignore the basics, investigate red flags and changing trends. Make sure you know where the assets are located and go and see them. Don’t let the client put you off if something doesn’t feel right.  Get outside assistance / advice if needed.  Asset Valuation companies and field examiners are used to dealing in high pressured situations, know what questions to ask and where to look.  Act quickly to maximise recoverable value and stop potential fraud escalating.

Vertis: That’s great. Thank you very much, Scott.

The views expressed in this interview are solely those of Scott Fuller in his personal capacity and do not represent the views of any current or former employer. This document has been prepared for informational purposes only and does not constitute investment advice or a solicitation to invest.

At Vertis we are building the leading financing platform for Europe's Lower Mid-Market. We are doing this across cash-flow lending via our strategic partnership with DunPort Capital Management as well as asset-backed lending via Vertis Capital Solutions.

Published by the Investment Team at Vertis.