Axos Financial, the midsized US bank that counts Donald Trump among its largest borrowers, is hitting back against short sellers who have raised questions about its past dealings with cryptocurrency companies and the former president.
Short selling — a technique hedge funds and others use to profit when a stock drops — in Axos shares has soared 190 per cent this year. Nearly $227mn worth of the bank’s stock had been sold short as of Friday, according to market analytics firm S3 Partners, making Axos one of the most heavily shorted regional banks in the US.
Shares in Axos have fallen roughly 5 per cent since the bank reported on Thursday that its profits had risen a better than expected 42 per cent in its latest quarter, but confirmed for the first time that it had taken in $235mn in deposits from crypto companies earlier this year.
Those deposits included an unspecified sum from Binance US, a US-based crypto exchange that the Securities and Exchange Commission alleged in June was “secretly controlled” by Binance Holdings, the operator of the world’s largest crypto exchange, Binance.com.
The SEC has sued Binance Holdings, alleging abusive client practices. Binance US has called the lawsuit “baseless”. Binance Holdings said at the time that it took the allegations seriously but “they should not be the subject of an SEC enforcement action”.
On a call with analysts on Thursday, Axos chief Greg Garrabrants said the bank had been the subject of tweets from short sellers about its effort to expand into cryptocurrency that “deliberately confused” investors, adding that “an attempt to link us” to Binance.com was a “false statement”.
Garrabrants confirmed that Axos had taken in hundreds of millions of deposits from crypto companies earlier this year, including from Binance US, but said it had since decided to pause its crypto expansion, closed those accounts and returned the funds.
“There’s nothing that’s impacting us with respect to this,” Garrabrants told analysts. “This is just attempts by folks who are short the stock to try to make something out of nothing.”
Analysts did not ask executives about the bank’s loans to Trump.
Marc Cohodes, a veteran short seller and the most vocal of the Axos naysayers, argues that the bank has worked with some contentious clients, and that investors would have been helped by having more information about the risks of working with those clients.
If investors knew these risks “they probably wouldn’t own the stock, and customers wouldn’t bank there”, he told the Financial Times.
Axos, through a spokesperson, said the bank was a “highly diverse financial institution” with a “client acceptance criteria well within the mainstream of financial institutions”.
Axos, like other banks, was not required to disclose details of individual clients, the spokesperson said, adding that such disclosures could violate privacy laws. Both Trump and Binance US had multiple other banking relationships at the time they became clients of Axos, he added.
The spokesperson said the bank’s Trump loans were first-lien positions against “well-performing” properties. The client relationships that short sellers seek to highlight “do not support a broad generalisation about our more than 750,000 customers”, he said.
In early 2022, Axos issued two loans to Trump and his companies: a $100mn loan on Trump Tower, Trump’s signature New York office building, and a $125mn loan against Trump National Doral, a hotel and golf resort that Trump owns in Miami.
Those loans have featured in New York State attorney-general Letitia James’s civil fraud case against Trump that began earlier this month. According to the lawsuit, which does not accuse Axos of doing anything improper, the bank lent money to Trump without getting formal statements of his net worth, instead relying on a raw list of assets and liabilities, and making its own calculation.
The case could ban Trump from doing business in New York, potentially leading to forced sales of his properties which could put loans against them at risk. Axos and Trump’s other lenders could still recoup their money if the buildings sell for more than the former US president has borrowed against them.
Axos structures its mortgages to make sure they will get repaid, even if there are “legal issues that may arise from time to time with building owners or sponsors” among its borrowers, the bank’s spokesperson told the FT. The spokesperson said Axos appropriately relied on independent appraisers to evaluate the Trump loans.
Axos has not disclosed in its financial statements that Trump is one of its most significant borrowers and has not been required to do so, according to the company spokesperson. Its most recent financial statement says its largest exposure to any single borrower is $250mn.
Axos’s filings had also not previously disclosed its past dealings with Binance US.
John Coffee, a professor at Columbia Law School and an expert in securities laws, said: “Just because a client is controversial doesn’t require disclosure.”
Roger Weber, a Georgia State University professor who specialises in banking law and has studied disclosure issues, echoed Coffee but added that banks and other companies were subject to more open-ended requirements to tell shareholders about material business risks that emerge.
“The fact that [clients] are unpopular isn’t something you need to disclose,” he said. “But if . . . there is a material change in the credit risk of those borrowers — such as in the case of Trump if he is no longer able to do business in the state of New York — and they didn’t disclose that, then I think the bank opens itself up to being accused of inadequate disclosure.”
So far Axos has defied its sceptics. It has grown quickly — upping lending by 50 per cent over the past three years. With $19.4bn in assets, it ranks as the 95th largest bank in the US.
Its shares have bucked widespread concerns about regional banks, falling only 7 per cent this year as of Monday’s close while the KBW Nasdaq regional bank index is down about 26 per cent.
Axos told the FT the “false narrative” of the short sellers’ campaign was “led by an effort to distract from the fact that Axos is one of the top-performing financial institutions in the United States”.
The bank began working with Binance US earlier this year, the spokesperson said, after the failures of Silvergate and Signature, two regional banks that had welcomed crypto clients. Axos did not process consumer transactions for Binance US or facilitate transfers between it and Binance.com, the bank said, adding that it closed the Binance US accounts in August after a review of the “regulatory landscape”.
Earlier this year, the SEC questioned Axos’s decision not to disclose in its annual financial report that it was being sued for $100mn by MUFG Union Bank. Axos eventually lost the case, but MUFG Union Bank was only awarded $18mn in damages.
Axos responded to the SEC that it did not believe it had been required to disclose the lawsuit to shareholders. It pledged to review how it disclosed “pending or threatened litigation” and update its disclosures in future filings as needed.
