This story was updated at 11:34 a.m. Eastern to include a statement from the company.
When ride-sharing companies like Uber and Lyft decimated the taxi markets in major cities, the business of lending to taxicab owners and operators fell through the floor. Medallion Financial, whose core business was making loans backed by taxicab medallions (essentially, operating permits), saw its stock price nosedive.
To arrest the falling shares, between 2014 and 2017 Medallion Financial and its president and COO, Andrew Murstein, devised two schemes that ran afoul of U.S. securities laws, according to a complaint filed by the Securities and Exchange Commission.
First, in 2015 Medallion and Murstein hired a “stealth” public relations firm, Ichabod’s Cranium, to post positive stories about the company and tout its stock. The posts, some appearing on Huffington Post, Seeking Alpha, and TheStreet.com, used fake identities, and the payments to the media relations firm were not disclosed. The promoters of Medallion’s stock also did not disclose their affiliation with the company.
“Murstein allegedly paid for more than 50 articles and hundreds of positive comments, which were really paid advertisements placed across the web in an effort to deceive investors about the value of Medallion’s stock,” said Richard Best, director of the New York regional office.
Second, Medallion and Murstein fraudulently increased the carrying value of Medallion Bank, a subsidiary of Medallion Financial, to offset losses relating to the taxicab medallion loans. The SEC alleges that when the company’s existing valuation firm refused to cave to Murstein’s pressure to increase the bank’s valuation, Murstein fired the firm and hired an investment bank to provide an inflated valuation of the bank.
“Murstein quickly found an investment bank that was lured by his quid pro quo offer: provide the requested valuation number in exchange for much more lucrative investment banking work in the future,” according to the SEC complaint.
Said Best: “Companies … cannot shop for higher valuations when there is no evidence to support them.”
Despite the deteriorating value of the collateral securing the bank’s loan portfolio, Medallion’s valuation jumped from $166 million in the second quarter of 2016 to $290 million in the fourth quarter of 2017.
The SEC charged that Medallion also made false statements in its SEC filings as to why the firm’s valuation increased, claiming that there were parties interested in acquiring the bank and that a “court ruling involving a marketplace lender” had heightened the interest of potential merger partners.
In a statement released the day the charges were made public, Medallion Financial said: “We intend to vigorously defend against the SEC’s unfounded charges and are confident we will be completely vindicated. … We believe that none of the allegations in the SEC complaint gives rise to a securities violation and are confident that the full record will show that Medallion Financial Corp. and Andrew Murstein complied with the law.”
The company said that its actions were designed to provide an accurate understanding of the company’s financial position and a transparent valuation at a time when “short-sellers were engaged in an online campaign to drive down the company’s stock price for their personal profit.”
Medallion noted also that “the SEC does not even allege that the company’s actions had any market impact whatsoever on the price of Medallion stock and Murstein has never sold a single share of Medallion stock.”
The SEC charged Murstein and Medallion with violating the antifraud, books and records, internal controls, and anti-touting provisions of federal securities laws. Murstein is also charged with making false statements to Medallion’s auditor.
The complaint also charges Ichabod’s Cranium and its owner, Lawrence Meyers, with touting and fraud. The SEC seeks permanent injunctions, disgorgement plus prejudgment interest, and civil penalties. In addition, the SEC seeks an officer-and-director bar against Murstein.