(Bloomberg) -- A meeting between a school’s leaders and dozens of dads was drawing to a peaceful end in February 2022 when the bank executive Gregory Garrabrants made his move.
Months earlier, the head of Axos Financial Inc. had emailed the other parents at the private Christian school in California, asking them to vote him onto the board so he could fight against a “secular, leftist, anti-American ideology.” The school’s head kicked out the family, citing the banker’s “overly aggressive” behavior. Garrabrants sued, and a judge let his kids return while the case played out, so long as he continued to “stand down.” At the meeting a few days later, he stood up.
“Where do you want me, inside the school with my children enrolled — and where I will behave — or do you want me on the outside?” he said, according to an account in a court filing, adding he’d tie up teachers in litigation for years. “I just won a long-term lawsuit, and I know that I will win.”
Garrabrants stands out on Wall Street, not just because he’s among the industry’s best-paid chief executive officers. Three of his most operatic clashes — with whistleblowers, short sellers and a school that costs up to $26,330 a year — show what he’s willing to do. It’s worked so far: Axos profits have jumped from one record to another for more than a decade and its stock has left most of the industry in its dust.
But now the bank faces a reckoning. It has huge loans to US commercial real estate right as the $20 trillion market is getting upended by vacancies and high interest rates. Axos shares tumbled in June when a prominent short seller, Hindenburg Research, accused it of lax underwriting and glaring problems in its property portfolio. And when B. Riley Financial Inc.'s stock plunged this August, Axos defended its loan to the embattled firm’s founder, saying it’s mostly covered by collateral.
Garrabrants, who helped prop up Donald Trump’s troubled empire when others wouldn’t lend to it, has been known to respond to pressure with a similar strain of combative confidence. The question is whether that will continue to work in tougher times.
Jeff Sime, an Axos executive until 2022, called Garrabrants careful, driven and stubborn. “He doesn’t shy away from a fight, and he sometimes pushes things beyond probably where they need to go,” he said. “He has a vision, but sometimes he doesn’t want to listen to other people,” he added. “That got a little old after a while.”
Garrabrants, 52, told Bloomberg News he almost always asks colleagues for their views, prays nightly for the wisdom to make decisions and sees integrity as more important than “narrowly ‘winning’ in the wrong way.” The origin of his drive, he added, “can be summed up in one word — gratitude. I am grateful for the opportunities this amazing and beautiful country has provided me in my career. I am grateful for the love of learning my father, a police officer, and mother, a schoolteacher, instilled.” At the same time, he refuses to “accept mediocre performance from myself or my colleagues. A high-performance culture wins in the marketplace and provides incredible career opportunities for the right people.”
Axos was a young lender doing business as Bank of Internet USA when Garrabrants took its top job in 2007, after stints at McKinsey & Co., Goldman Sachs Group Inc. and IndyMac. The bank was making home loans and turning a $3 million profit, but Garrabrants had something else in mind: He told investors about an “opportunity to significantly increase profitability while maintaining its strong focus on safety.” It would just take a few adjustments.
The bank became known for commercial real estate, mortgages to foreigners and what it calls exception-based lending — to borrowers whose circumstances might make rivals pause. “Joe Smith came in and he got a loan, and Joe Smith had been turned away by all the other banks,” said Ted Allrich, who was board chair until 2017, just before the bank rebranded as Axos. “And then Joe told his buddies at the next dinner that, ‘Hey, I got my loan.’ And those guys perked up.”
If the bank sometimes makes loans that wouldn’t fly with competitors, it more often rejects ones they’d accept, according to Garrabrants, and generally demands more collateral. It “has achieved one of the lowest loan losses in the country over multiple decades in a wide array of lending businesses,” he said, and “has never lost a single dollar on any loan to a foreign national.”
Recent customers have included the media company of conspiracy theorist Alex Jones, whose lies about the Sandy Hook Elementary School massacre in Connecticut sent him into bankruptcy, though the bank closed its accounts in 2023. After two cryptocurrency-focused lenders collapsed that year, Axos opened accounts for Binance.US, then closed them months later once regulators accused the crypto-trading platform of violating securities laws. (Binance.US called those claims baseless.) And Axos offered loans through World Business Lenders, a firm known for interest rates as steep as 125%.
Axos opened the accounts with Jones’ company on behalf of the bankruptcy receiver, Garrabrants said, and the bank isn’t working with crypto companies or WBL, where annual rates were high because the loans had short terms and high costs.
A prime example of the bank’s willingness to embrace customers others wouldn’t is its business with the ex-president’s empire. After the Capitol riot in 2021, several of Trump’s longtime banks stopped doing business with him and his company — as big debts, much of them personally guaranteed, were coming due. A $100 million loan on Trump Tower had been put on a watchlist before Axos refinanced it in 2022. The bank made a loan to his Doral golf resort in Florida that year, too. Trump was also facing multiple civil and criminal investigations, including ones that led to a conviction and a three-year ban from doing business in New York. (When he needed a bond to appeal that civil case, Trump turned this year to a company run by subprime billionaire Don Hankey, who’s been a major Axos shareholder.)
To Garrabrants, discriminating against customers for their politics “undermines the fabric of our civil society.” The loans to the Trump Organization are safe, with “a lower than 30% loan-to-value ratio,” and it’s been “a model borrower.”
Eric Trump, one of the former president’s sons and an executive at his company, said he’s “honored to call Greg a friend.”
Allrich found himself surprised by this business with Trump. “I thought, ‘Gee, I wouldn’t have made that loan,’” he said. But he called Garrabrants smart and thorough, adding that he’s confident in the bank: “They don’t just hire a 27-year-old to do underwriting.”
Charles Matthew Erhart was 27 when the bank hired him in 2013, not as an underwriter but an auditor. When he started looking around, he found red flags, misbehavior and coverups, he alleged in a lawsuit that says he was fired in 2015. Four customers accounted for about a quarter of total deposits, making the bank vulnerable to sudden withdrawals, and staffers cold-called lottery winners to pitch services, according to Erhart, breaking California law by not telling them it was recording them. In both cases, he said a senior executive told him not to put his concerns in writing.
He also alleged that the bank was making big loans to politically exposed foreign nationals and that Garrabrants deposited checks not made out to him into a personal account. Erhart passed tips and documents to regulators, plus a spreadsheet to his mom in Kansas for what he said was safekeeping. He alleged that when the bank fired him, Garrabrants told colleagues he’d bury him.
The lender denied his allegations, which Garrabrants called sensational and “intended to cause maximal reputational harm.”
It also sued Erhart, accusing him of not finishing his actual work and going rogue on unapproved investigations, which he denied. Then it sued his mom. He accessed some of the bank’s documents on his girlfriend’s computer; the bank sued her, too. And Garrabrants filed his own lawsuit, alleging Erhart was paranoid, obsessed and behaving outrageously because he was on steroids, which he denied.
“When Axos was permitted to delete the information from the mother’s and the girlfriend’s computers, the suits were dismissed,” Garrabrants said. Erhart “was only terminated after he failed to return to work after medical leave” and doesn’t qualify as a whistleblower, he added; the former auditor says otherwise.
When the lawsuits went to trial, a jury awarded him $1 million for his employment claims and $500,000 for defamation, and a court added $2.4 million for his lawyers last year, though he didn't get additional money known as punitive damages for being defamed. (The bank has appealed.) A separate jury heard the CEO’s complaint, finding that Erhart invaded his privacy even though he was acting in good faith as a whistleblower, though an appeals court tossed Garrabrants’ victory because the jury instructions were wrong. A new trial is scheduled for February.
It will be “extremely difficult for Garrabrants to prevail,” according to Carol Gillam, a lawyer for Erhart. She called the bank’s approach “the paradigm of scorched earth” and the lawsuits against his mom and girlfriend “purely vindictive.”
The bank is up against another former worker, too. Jennifer Brear Brinker, a credit review officer, alleged in a federal lawsuit in 2022 that she found issues in underwriting, monitoring and contingency planning, and that bosses watered down her findings. The bank fought back, denying her allegations and saying she had no reason to be in federal court. In October, a judge dismissed one part of her lawsuit while allowing her to move forward.
The next move from Axos was in character. It filed a counterclaim, accusing her of breaking the confidentiality agreement she’d signed on her first day of work, which she denies.
“This is not the first time Axos has sued a whistleblower to keep them quiet,” Robert King, a lawyer for Brinker, said.
Garrabrants said her lawyers are trying to “exact a large settlement.” She wasn’t retaliated against, he added: “Her entire department was laid off.” And the bank gets sued by its own workers less often than similar companies, which “speaks volumes about the positive workplace culture.”
Business boomed even as the lawsuits flew. Axos has posted record earnings every year since 2012, sending its profit up more than 15-fold. Since Garrabrants took over, its stock price has soared and the bank’s assets have jumped from about $1 billion to more than $22 billion.
He has been rewarded for that success, making more than $34.5 million in 2018, topping JPMorgan Chase & Co.’s Jamie Dimon. That number was based on “an estimated value of future awards,” Garrabrants said, and can’t be compared “apples-to-apples” to another executive’s annual pay.
Short sellers, who profit when stock prices fall, say it’s all too good to be true: The bank is overvalued, its credit metrics can’t be believed and its outsized commercial real estate business spells trouble.
Hindenburg was still in the news for a big corporate takedown in India when it said the bank’s portfolio is “filled with clear problem loans.” The short seller’s June report painted an ominous portrait of a bank that “doubled down” on commercial real estate while its peers backed away, leaving Axos exposed to a plummeting industry. Loose underwriting makes matters even worse, according to the report, which said the bank's money has made its way to sketchy characters and projects. Axos called the report “misleading, incomplete and false.” It works with major real estate funds, according to the bank, takes “the most senior secured position in these loans” and would only lose any principal after others get wiped out. The bank’s commercial real estate business has a “near-perfect track record,” Garrabrants added.
Nathan Anderson, who runs Hindenburg, said he stands behind his work. “Seniority would only offer partial protection for a portfolio underwritten with lax standards,” he said. “The company has provided virtually zero transparency regarding its underlying project exposure and seems to want the market to believe it is somehow immune.”
David Chiaverini, an analyst at Wedbush Securities Inc. who gives the stock a neutral rating, said he hasn’t come across “anything worrisome.” He expects some losses once the environment gets worse, but not significant ones. “The credit underwriting, from my vantage point, has been good.”
After taking a tumble when Hindenburg’s report came out, Axos shares have climbed.
The bank’s most unusual dispute over short selling has nothing to do with its own stock. Axos is fighting Scott Reynolds, who was working for a troubled Florida securities firm in 2019 when he took a short position in a small biotech company using an account at Axos Clearing, the unit that executes trades. When Axos realized the size of the bet, which it said in legal filings “far exceeded” limits he agreed to, it ordered the trade unwound.
To do that, the Florida firm had to buy a lot of shares of that biotech company fast. As it did, the stock price jumped — and its losses deepened to more than $16 million. The firm was pushed into insolvency. Axos was on the hook.
In 2021, inside the arbitration system run by the finance industry, Axos Clearing won $15.4 million in damages, plus $2 million of interest. The bank even cleared a way to coming out ahead: When Axos bought that unit, it delayed paying more than $7 million of the price — creating a kind of cushion in case something big went wrong — then decided to keep that money after the Reynolds loss, though the sellers have sued to get it. The dispute went to trial, and a judge hadn’t ruled as of early September.
Reynolds still owes Axos millions of dollars. The bank has gone after his retirement savings as well as a pot of money kept by his lawyer, filings show. Now it’s looking at his waterfront mansion in Miami Beach. Reynolds told a court in December that Axos shouldn’t be allowed to touch it, saying state law makes homesteads sacrosanct. According to the bank, he’s rented it out.
“It’s been a grueling, long process,” Reynolds said in an interview. “I’ve just been trying to hang on.”
Garrabrants said Axos remains undeterred: “We continue efforts to collect.”
Trouble was brewing long before Garrabrants addressed the other dads. In 2020, he spoke about masks in class at a board meeting, after a director asked him not to. Then the school’s head said he suspected the banker was behind anonymous emails about vaccine mandates and unconscious-bias training. (Garrabrants has said he didn’t send the emails but knows some of the parents who did.)
Things escalated when he ran for the school’s board. He emailed the other parents about what he called a transgender and Marxist curriculum and a “leftist zeitgeist that exaggerates and focuses disproportionately on deconstructing and ‘debunking’ our heritage.” He wanted patriotic students who defend “limited government, individual responsibility and free market economics.” At a time when executives across the country were saying “Black Lives Matter,” Garrabrants was telling families that two board members were “not eligible” because of their support for it.
Parents complained about Garrabrants, emails show. Another dad in finance offered to help the school, saying he oversaw a dozen people who made more than a million dollars a year. “Huge egos,” he wrote. “I can handle.”
Just after Garrabrants spoke at the meeting, he amended his lawsuit. Then he and the school settled. A court filing doesn’t spell out the terms, except that they involved “a number of actions and inactions” that would last until the next school year. The school’s head and its lawyer didn’t respond to messages.
“I dropped my lawsuit as soon as my children were reinstated by the school and I received legally enforceable written assurances,” Garrabrants said, adding he has “hundreds of emails from parents expressing support for my candidacy and outrage over the actions of the headmaster.”
A few weeks after the settlement, in a luxury community in San Diego County, Garrabrants or someone working for him broke his neighbors’ water line during a dispute over property boundaries, the neighbors alleged in a lawsuit. He countersued last year, saying they encroached onto his property and suggesting they were angling for a payoff.
Garrabrants says “these relatively few legal” actions don’t take up much of his time and that he and his bank aren’t overly litigious. He called the lawsuits a last resort.
--With assistance from Bre Bradham, Steven Church, Hannah Levitt and David Scheer.
©2024 Bloomberg L.P.