The investigation into abusive trading in the mutual fund industry is proving a bigger problem than ever suspected at J.B. Oxford ( JBOH), a Los Angeles-based brokerage.

The company, in its 2003 annual report, said its ability to continue operating as a "going concern" could be compromised by the outcome of a regulatory and criminal investigation into the firm's role in the far-reaching trading scandal.

In November, regulators at the Securities and Exchange Commission notified J.B. Oxford that the firm was facing a possible enforcement action for its role in clearing and processing trades for several brokerage firms that may have engaged in improper trading of mutual fund shares.

Best known for its online brokerage division, J.B. Oxford generates roughly 18% of its $19 million in annual revenue from providing clearing services. Last September, New York Attorney General Eliot Spitzer alleged that J.B. Oxford processed some illegal mutual fund trades for Canary Capital Partners. Spitzer's $40 million settlement with Canary launched the sprawling investigation of the mutual fund industry.

The company continues to say it is cooperating with the investigation and hopes to settle the matter over allegations of illegal late trading. But in its latest filing, J.B. Oxford, which has lost a little more than $20 million the past three years, paints a dire picture of the situation it finds itself in.

"Should the outcome or judgment against the company from the SEC proceedings related to the ongoing mutual fund investigations be significant, the demand for payment from such outcome or judgment coupled with the company's deteriorating financial results may cause substantial doubt regarding the company's ability to meet its obligations as they become due," the filing says.

The firm says the scandal could tarnish its reputation and drive away existing customers who process and execute their trades through J.B. Oxford's clearing. In the worst-case scenario, the company said, it could be forced to file for bankruptcy protection, if the scandal makes it impossible to find financing to continue its operations.

In early trading Wednesday, shares of J.B. Oxford were up 9 cents, or 2.1%, to $4.26 a share. A J.B. Oxford spokeswoman could not be reached for comment on the firm's latest disclosure.

J.B. Oxford isn't the only brokerage firm with a clearing operation that's facing scrutiny.

Bear Stearns ( BSC), which maintains the biggest clearing operation on Wall Street, also is being investigated by the SEC and federal prosecutors in New York over similar allegations that it permitted customers to use its clearing platform to engage in abusive mutual fund trading.

In recent weeks, federal prosecutors and attorneys for the SEC have been questioning people about Bear Stearns' role in clearing and processing trades for a number of small brokerage firms that may have permitted hedge funds to engage in either market-timing or late trading of mutual fund shares. A person familiar with the investigation says that at least two Bear Stearns employees were interviewed by federal prosecutors within the past month.

A Bear Stearns spokesman declined to comment.

Sources say investigators are trying to determine what managers in Bear Stearns' clearing division knew about any improper trading. In particular, regulators are trying to learn whether officials at the big Wall Street firm were aware that some brokers might have used deceptive measures -- such as multiple accounts and false identities -- to help their clients engage in improper trading.

Two weeks ago, the same federal prosecutors investigating Bear Stearns filed the first criminal charges in a market-timing case. Prosecutors charged the former top executives of Mutuals.com, a Dallas brokerage, with engaging in a deceptive scheme to conceal the market-timing trades made on behalf of the brokerage's hedge fund customers.

Market-timing is the term for a shady strategy in which mutual fund shares are bought and sold frequently in order to profit from price differences in different markets. It's harmful for the vast majority of mutual fund investors, because it can dilute the value of a fund by driving up trading and administrative costs.

Late trading is an even more serious offense. It means a mutual fund company permits a favored customer to buy shares that were priced prior to the release of market-moving news, giving the investors an unfair advantage.

On another regulatory front, SunLife Financial's ( SLF) Massachusetts Financial Services paid a $50 million fine to the SEC over allegations that it made payments to brokerages to market its mutual fund products. The fine is part of a crackdown by the SEC on so-called "shelf space" payments, in which mutual fund companies pay brokers to promote their mutual funds to their customers.

In February, MFS agreed to pay a $225 million penalty and suspend its two top executives as part of a complex deal with state and federal regulators looking into improper trading in the company's mutual funds.