Medallion Financial Corp (NASDAQ: MFIN) stock has long been one to avoid simply because of the business the company is in. Financing loans on taxi medallions, exactly the part of the industry being killed by Uber Inc (NYSE: UBER). This is now compounded by the SEC filing suit against the company for illegally touting the stock as perhaps some sort of last gasp comeback attempt. Uber had nothing to do with these charges but is the cause of the company’s base problem.
To understand Medallion Financial we need to understand the American taxi business. A car and a driver are not all that is required – it is also necessary to have a taxi medallion. That’s a licence from the local authority to have a cab on the street. For decades the number of these medallions has been controlled – by which we mean restricted. The medallions are tradeable, they can be bought and sold.
The effect of this was that the owner of a medallion could lease it out to a car and driver combo. Standard rates were $40,000 a year per 12 hour shift 7/52. That gives the medallion itself a significant capital value – $1 million was entirely normal for some time.
Medallion Financial was the bank/finance house which financed the loans to drivers and or speculators who acquired those medallions to use directly or lease out.
Then comes Uber. The major effect on those constricted taxi markets being lots of people providing services without requiring a medallion. The value of medallions plummets, Medallion Financial’s business could be said to be in trouble. The stock declines and that’s that. In the real world, it recovered a bit when NYC launched a $65 million scheme to aid folks losing money on their medallion loans but that’s just the one city and doesn’t address the base problem. Medallions are now worth much less, if indeed they’re still worth anything. Certain auctions for limited new supplies attracted no bids at all for example.
So, what could Medallion Financial do? Well, as the SEC alleges they got varied folk to go around writing about how wondrous Medallion Financial was as an investment. Some of the articles by Lawrence Meyers, who is named by the SEC, can still be found on various websites. Fun research shows that other articles at places like Huffington Post were produced by a fashion model turned “investment guru”.
Anyone at all is clearly allowed to have an opinion on anything. But the rule here is that a company can pay for coverage – that’s what an advertisement is after all – but it cannot pay for a piece that says it’s a good investment. That’s “touting” and is illegal.
Just in case you’re wondering, no, I was calling medallions a dog investment at this time, here and here. I even turn up in the footnotes of academic papers on the subject of Uber’s impact upon medallions.
The larger point here should be obvious, beyond considerations of Medallion Financial’s likely fate – I’d rate that as not good myself – which is that it’s necessary to be careful about information sources. Touting does happen, shouldn’t but it does. That pollutes the information well for all of us and the only real cure is not to wholly and totally believe any one single source. Which is useful guidance upon investing.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.