Axos Clearing lost an arbitration complaint to a group of 102 investors at the end of last week after facing claims that the firm “turned a blind eye” at malfeasance at a broker-dealer it worked with, and a FINRA arbitration panel on Friday ordered Axos to pay $49.2 million in legal fees costs and damages to clients of Worden Capital Management, a defunct broker-dealer that used Axos as its clearing firm.
It is the latest in a series of stunning and multi-million dollar FINRA arbitration awards that Wall Street firms, including Stifel Financial Corp. and UBS, have lost in the past few years.
According to the three-person FINRA panel’s award, Worden Capital and its brokers used the 102 client accounts “as personal slush funds.” The clients also alleged fraud, churning, excessive trading and commissions and other charges, according to the award.
Worden Capital and its brokers engaged “in egregiously unsuitable and excessive trading and churning, garnering over $16 million dollars in commissions and fees while costing nearly all of [clients] out-of-pocket losses of over $12 million dollars,” according to the award.
Axos Clearing works with approximately $44.0 billion of assets, according to the company's website.
Worden Capital closed doors in 2021 and its owner and CEO, Jamie Worden, was barred from the securities industry.
At the end of 2020, FINRA fined Worden Capital Management $350,000 and ordered it to pay restitution of $1.25 million as part of a settlement; the key issue was the firm being accused of failing to have in place the oversight to catch brokers' excessive trading, known in the industry as churning.
A spokesperson for Axos did not return calls on Tuesday to comment.
However, Axos quickly filed a motion to vacate the arbitration award in federal court in Manhattan. “The entire arbitration was infected by fatal error after fatal error after fatal error,” according to the Axos court filing. “The award cannot stand.”
The odds of a federal judge overturning a FINRA arbitration award is extremely unlikely.
It was a lengthy lawsuit, with the claimants in 2022 filing their lawsuit against Axos, Worden Capital and Jamie Worden.
The three-person arbitration panel did not give a reasoning or legal argument for its award, which is customary.
The arbitration award is in three parts: $35.85 million in damages to the 102 clients; general costs to Axos of $72,000; and attorneys’ fees of $12.3 million.
“At the end of the day Axos served as the clearing firm for a notorious Wall Street boiler room,” said Scott Silver, a plaintiff’s attorney. “Axos had full transparency into Worden’s business."
In a constant fight over control of clients, the financial advice industry has a long history of such allegations and disputes.
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