The president and COO of Medallion Financial Corp., Andrew Murstein, dangled potential equity sale opportunities in front of investment banking firms as part of a scheme to suggest the valuation of one of the company’s subsidiaries was higher than it was, the Securities and Exchange Commission (SEC) has charged.
The firm, which makes loans to companies to buy the medallions that permit them to operate cabs in New York City and other metro areas, saw its business drop in 2015 when Uber and other ride sharing app companies caught on as taxi alternatives.
Faced with big drops in its stock price along with the drop in the value of medallions, which the company uses to collateralize its loans, Murstein forced through a change in the way the company values its banking subsidiary, Medallion Bank, from book value to fair market value, a more subjective measurement.
Using the new method, the value of Medallion Bank increased from $149.9 million to $166.5 million in 2016, an increase of 11 percentage points, and then Murstein used tactics to justify even higher valuations over the next year, suggesting the company was worth $290.5 million by the end of 2017, almost double in value even though its book value was trending lower than ever because of a growing numbers of bad loans.
“Medallion Financial’s sudden increases in fair value — at a time when the collateral values of the Bank's loans were plummeting — resulted from Murstein’s behind-the scenes conduct,” the SEC said in its complaint against Murstein and the company. That conduct included “firing Medallion Financial’s valuation firm, instructing the new valuation firm on the correct value, biasing the new firm with possible incentives, and concealing information from Medallion Financial’s Auditor.”
Separate from the effort to boost the bank’s valuation, Murstein, without informing others in the company, engaged a public relations firm and an independent communications contractor to help raise the company’s slumping stock price by anonymously touting the company’s performance and arguing in favor of a higher valuation in influential media outlets.
Potential sale opportunities
In 2015, after forcing the switch in valuation method from book to fair market value, Murstein, who held several executive roles at the company, including chief credit officer as well as president and COO, and was the founder’s son, engaged a specialist to provide its opinion on the value of the company’s subsidiary bank to be used in the parent company's 10-K filing.
When the valuation specialist refused to justify going higher than the 11 percentage-point increase in its opinion, Murstein took a different tack and suggested to a handful of investment banks that the company was considering selling an equity stake in the bank and wanted their views, in exchange for potentially having them handle the sale, on whether they could support a valuation of around $300 million.
Two of the financial firms replied with valuation ranges that included the $300 million target. Another firm Murstein reached out to said it could support a valuation of $200 million, a target Murstein suggested to them.
Murstein used the higher valuations these firms provided to justify using a higher valuation in the company’s financial filings, but the effort generated push-back from the internal auditor, who said the higher valuations were part of “pitch” documents and weren’t valuations the firms were standing behind.
The auditor also pushed back against a decision by Murstein to fire the valuation firm that refused to go higher than the initial 11 percentage-point increase.
“I would recommend that you continue to utilize the same third party specialist quarter-after-quarter,” the auditor told Murstein, but the advice wasn’t taken.
Medallion’s CFO played little role in the valuation issues, the SEC’s complaint suggests. In their only substantive exchange on the matter, according to the SEC, the CFO talked in an email about the range the bank needed to hit in an upcoming quarter if the valuation was to be consistent from one quarter to the next. Murstein appeared to use the exchange as a way to influence the valuation provided by one of the investment banks he had reached out to.
The SEC charged Murstein and his company with violating a number of anti-fraud provisions in federal securities laws.
Separately, Murstein was charged with making false statements to the company’s internal auditor.
The SEC also charged the PR firm Murstein worked with to talk up the company’s stock without disclosing it was being paid to do so.
The SEC is seeking permanent injunctions, disgorgement along with prejudgment interest, and civil penalties, among other penalties.
“Companies … cannot shop for higher valuations when there is no evidence to support them,” Richard Best, director of the SEC’s New York regional office, said in a statement.
In response to the charges, Medallion issued a statement contesting the SEC's findings.
The statement says, in part, "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 actions in question occurred five or more years ago at a time when short sellers were engaged in an online campaign to drive down the Company’s stock price for their personal profit by spreading misleading and disparaging information and misrepresenting its business. Medallion sought only to provide the market with an accurate understanding of its financial position and prospects and an appropriate and transparent valuation of Medallion Bank and its other assets.
"The SEC’s attempt to mischaracterize Medallion’s good-faith efforts defies logic when the SEC does not even allege that the Company’s actions had any market impact whatsoever on the price of Medallion stock and Mr. Murstein has never sold a single share of Medallion stock."