Watching Axos Financial; The Bear Cave Newsletter Issues Report On Co Titled "Problems At Axos Financial (AX)"

Author: Benzinga Newsdesk | November 16, 2023 11:34am

https://thebearcave.substack.com/p/problems-at-axos-financial-ax?utm_campaign=email-half-post&r=69dzc&utm_source=substack&utm_medium=email

 

Axos Financial (NYSE:AX) describes itself as "a technology-driven financial services company that provides innovative banking products and services to customers nationwide." Formerly known as Bank of Internet, Axos Financial is one of the best-performing banks of this century, up roughly 13-fold since its 2005 IPO. Underpinning Axos's success The Bear Cave believes are risks in the firm's culture, loan portfolio, and crypto ventures not fully appreciated by the market.

With the exception of Tesla, perhaps no company has endured as much criticism from short-sellers as Axos Financial.

In April 2014, Kerrisdale Capital published on risks related to the bank's stretched valuation and new competition for deposits from other online banks.

In July 2014, Citron Research published on risks related to the bank's prepaid card business.

In 2015 and 2016, Marcus Aurelius Research published a total of 13 articles ranging on issues from "exotic loans to high-risk foreign nationals," exposure to payday lenders, and "a phantom ‘full service branch' in the Nevada desert."

In 2015 and 2016, The Friendly Bear also published a series of five articles regarding potential whistleblowers and "high-risk brokered loans."

In June 2017, Roddy Boyd at the Foundation for Financial Journalism published a collection of three articles about Axos and, most stunningly, alleged that the firm attempted to engage prolific short-seller Marc Cohodes as a paid consultant to "better understand how short sellers developed their opinions and how they shared their views."

Mr. Cohodes, who has exposed numerous frauds in recent decades and was one of the earliest critics of the now-defunct Silvergate Bank and Signature Bank, has also recently tweeted very critically about Axos, its leadership, and its potential bad loan exposure.

Along a similar vein, anonymous crypto researcher Cryptadamus published a September 2023 article titled, "The Axos Of Evil." The article highlights that Axos provided banking services for crypto-exchange Binance U.S. based on evidence from SEC and CFTC lawsuits. One exhibit from the SEC's litigation against Binance appears to suggest that Binance's U.S. division held roughly $350 million in deposits at Axos.

In a March 2023 podcast interview, Axos CEO Greg Garrabrants commented on the crypto banking industry and said, in part,

"I think that there is regulatory scrutiny that is probably disproportionate to the risk right now in crypto because of what's happened with Silvergate… So I think you have to look at this on a risk-based approach and make sure you are appropriately diligencing the companies and accounts. It's just unfortunate it got tarnished with the whole FTX debacle, because it did paint a picture that I think is not really fair to the rest of the industry." (32:06)

On Axos's earnings call last month, Mr. Garrabrants appeared to change his tune and said, in part,

"Due to recent regulatory changes in the landscape for U.S. banks and digital asset companies, we completed our previously announced exit of our small incubator deposit gathering business that's focused on selected digital asset companies such as exchanges, brokers and firms engaged in activities related to nonfungible tokens."

As part of its now shuddered foray into the crypto banking business, Axos previously launched an Axos stablecoin currency called AXX, launched a 24/7 payment network called AxPay, partnered with a blockchain-based payment platform, and even hired its Digital Asset Vice President from Silvergate.

The Bear Cave believes Axos's appetite for higher-risk business extends beyond its crypto ventures. For example, on the Axos wholesale portfolio lending webpage the firm boasts,

"Our flexible approach to underwriting allows us to fund mortgages others don't… Our wide range of programs, experienced team, and unique approach to exception-based lending allow us to say yes when others say no."

That philosophy is nothing new to Axos. In ads as early as 2015 Axos (then called Bank of Internet) was advertising its ability to "color outside the qualified mortgage lines" through "the art of exception-based lending."

 

One Axos client that fits the idea of "exception-based lending" may be former President Donald Trump, who has received loans totaling around $225 million from Axos for properties including Trump Tower and Trump's Doral resort.

An April 2022 investigation by Gretchen Morgenson into Axos's relationship with former President Trump reads, in part,

"An examination of legal filings, internal documents and land records shows Axos Financial has a history of handling atypical loans… The bank has also specialized in loans to foreign nationals, internal documents and its website state, and has offered a type of loan that allows borrowers who paid cash for a property to turn around and instantly take money out. Such loans may pose money laundering risks, banking analysts say."

Axos has also previously loaned companies tied to Jared Kushner tens of millions of dollars for property in New York, according to ProPublica.

One sign of cracks in Axos's real estate lending operations can be found in a September 2023 article from The Real Deal titled, "Axos Bank claims default on 132-unit Van Nuys senior complex." The article reads, in part,

"The lender, Axos Bank, filed a notice of default on the property at 7036-7040 Van Nuys Boulevard last July, records show. Landmark secured the original $25.5 million loan on the property in 2019. In its filing, Axos claims that the mortgage came due in March of last year and has since ballooned to nearly $31.2 million with interest and late charges."

Some of Axos's real estate lenders come from banks that have previously failed following subprime lending losses. For example, Keith Nisenson has served as Axos's Regional Manager of Multifamily and Commercial Real Estate Lending for the last fifteen years, according to his LinkedIn. Prior to that, Mr. Nisenson was a Vice President of Commercial Real Estate at IndyMac, which failed in July 2008.

Axos's longtime Vice President of Income Property Lending, Marion Bahner Surichaqui, also previously worked as a Vice President for IndyMac doing origination, compliance, and broker due diligence at the time IndyMac failed. Prior to that, Ms. Surichaqui worked as a Regional Sales Manager at Washington Mutual, which also later failed in September 2008.

 

Greg Garrabrants, who has served as Axos's CEO since 2007, also previously worked at IndyMac "where he led the business development group responsible for merger & acquisitions, joint ventures, and strategic alliances." In addition, Axos's Chief Operating Officer, Raymond Matsumoto, also previously worked at IndyMac for about thirteen years.

Beyond traditional real estate lending, Axos also appears to be tied to high-interest and potentially predatory small business lenders. The non-profit advocacy group, Stop the Debt Trap, released a public letter concerning Axos and its ties to World Business Lenders, which allegedly lent $67,000 to a New York restaurant owner at a ~268% interest rate, $175,000 to a Massachusetts food distribution business at a ~92% interest rate, and $55,000 to a Georgia engineering company owner at a ~88% interest rate. Oftentimes these loans are collateralized by the homes of small business owners, meaning if they do not pay back the loans, they can lose their homes.

One January 2021 lawsuit against Axos and World Business Lenders concerning a $450,000 small business loan with an ~86% interest rate begins, in part,

"MICHAEL GANGI PLUMBING AND HEATING CONTRACTORS… were pressured by a group of felons to take a loan, underwritten by an unscrupulous lender who has rented a federal bank regulated by [Home Owner's Loan Act], that was doomed to fail."

Most relevant for investors today appears to be Axos's ties to B. Riley, an investment bank and financial services company that has fallen ~40% in the last month. Bryant Riley, Chairman and Co-CEO of B. Riley, has "pledged as collateral 4,389,553 shares in favor of Axos Bank" as part of a margin loan.

In addition, a 2019 contract between B. Riley entities, on file with the SEC, calls for funds "to be deposited into escrow with Axos Bank." And on page 21 of its 10-Q filed in November 2021, B. Riley also appears to disclose that one of its subsidiaries received a loan from Axos under the Paycheck Protection Program.

Yesterday, Andrew Moore, CEO of B. Riley Securities, disclosed sales of around $1.2 million of B. Riley stock "made by a broker, without instruction by the reporting person, to satisfy a margin call." It is unclear who made that margin loan, or the total amount owed.

In September 2023, the SEC charged Gregory Giugliano, a partner at auditor Marcum, "with failing to sufficiently address and remediate numerous deficiencies in Marcum's quality control system." According to PCAOB records, Mr. Giugliano signed the form AP audit filings for B. Riley in 2017, 2018, 2019, 2020, 2021, and 2022.

Axos itself has a shaky history with its own auditors. Last year, Charles Matthew Erhart, a former Axos internal auditor, won a $1.5 million verdict against Axos. The suit "alleged he was terminated after he spoke out about an array of questionable activities he said he had seen at the bank."

Axos is audited by BDO USA and, according to PCAOB records, the BDO engagement partner responsible for Axos this year is Kathryn Elizabeth Wynn. According to PCAOB records, Ms. Wynn has served as an audit engagement partner for only two other public companies: clinical-stage biotech Inhibrx (NASDAQ:INBX) and microcap BioNano Genomics (NASDAQ:BNGO).

For the years 2018, 2019, 2020, 2021, and 2022 the BDO USA engagement partner responsible for Axos was Mr. Nathaniel Ryan Dick. According to the PCAOB database, he has served as an audit engagement partner for only one other public company: LadRx Corp (OTC:LADX), a microcap biopharmaceutical company that has fallen ~99% in the last few years.

Axos's model is not entirely untested. In fact, the first branchless internet bank, NetBank, was launched in 1996 and grew rapidly until its loans began to sour in 2007. Ultimately, the Wall Street Journal concluded,

"NetBank's model relied on paying high interest rates and $50 signing bonuses on core deposits such as savings accounts to entice customers. It was a costly way to attract deposits that are relatively easy to come by at brick-and-mortar banks. Constrained by the model, the company diversified into riskier but potentially lucrative subprime loans but, according to federal regulators, was undone by its sloppy underwriting."

After Netbank failed in September 2007, Axos acquired the NetBank.com domain, which now reroutes to the Axos homepage.

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