Axos warns of large 1Q charge from issue at brokerage unit
Axos Financial in San Diego is bracing for a $15 million hit tied to alleged fraud by one of its client’s employees.
The $9.8 billion-asset company disclosed in a regulatory filing Thursday that its Axos Clearing unit advanced about $16.5 million to a unnamed correspondent customer to cover losses stemming from unauthorized securities trades by one of the client’s employees.
The employee allegedly created a fraudulent scheme to evade the client's risk controls and falsified trades entered into the order management system. While the customer is required to compensate Axos Clearing against any losses, the unit holds only $1.4 million of the customer’s liquid assets.
Repayment of the remaining $15.1 million is uncertain.
Axos said it is unsure whether it will recover its potential loss, though it is unlikely any recovery would take place in the first quarter. It said it will likely establish a reserve against the advance of up to $15.1 million, which would reduce its after-tax net income by about $10.8 million, or 17 cents a share.
Axos Clearing started legal proceedings to seize a brokerage account with $13 million in assets owned by the customer’s employee. The unit also plans to seek recovery from various insurance policies and indemnifications.
“These potential sources of recovery are uncertain and subject to the outcome of future legal claims and proceedings, which cannot be predicted and may not be sufficient to fully repay the loss,” the filing said.