Does Uber deserve credit for Cohen’s comeuppance?
Does Uber deserve credit for Cohen’s comeuppance?
If Michael Cohen’s guilty plea to and cooperation with federal investigators eventually leads to the impeachment of President Donald Trump, ride hailing apps like Uber and Lyft should get some credit. They created conditions that eventually drove Cohen to plead guilty to criminal charges related to his New York City taxi medallion holdings.
A decade ago, as Cohen was riding high off the income he earned from leasing medallions he owned. But in 2014, as the medallions’ value deteriorated due to the rise of ride-hailing apps, Cohen turned to fraud to secure $20 million in loans from banks by using his medallions as collateral. Now, Cohen has become one of just four people in recent history to be ordered by the New York City Taxi and Limousine Commission to divest from medallions.
His guilty plea on Aug. 21 also paved the way for more moves by federal prosecutors to get closer to the president – including an immunity deal with Allen Weisselberg, the longtime chief financial officer of the Trump Organization – in the ongoing probe into Cohen.
The rise of the ride-hailing apps decreased the value of Cohen’s most important source of income: the medallions that he owned or co-owned, which numbered as many as 200 when he ran for New York City Council in 2003. During the 2016 president campaign, he took out a loan to make a $130,000 payment to the porn star Stormy Daniels, which at one time “was once equivalent to about 13 percent of the value of one of Cohen’s medallions. Now, it’s roughly 70 percent,” The Real Deal reported earlier this year.
Taxi medallions are not a particularly effective vehicle for financial fraud, but the collapse of their value caused widespread financial difficulties across the taxi industry, according to David Yassky, a former chairman of the TLC. “I have no reason to think that a taxi owner is more likely to do that than a restaurant owner or whatever,” he said in a telephone interview.
The market for taxi medallions followed a trajectory similar to the housing market before the 2008 financial crisis. A “handful of lenders came to believe that taxi medallions were a very solid piece of collateral and made loans at values that were probably unrealistic,” Yassky said. The loans that Cohen took out during the high times of the medallion market left him financially vulnerable when it crashed years later – just as Cohen was finding himself in need of some money.
It all began in 2010 when Cohen executed a $6.4 million promissory note with a bank by using his taxi medallions as collateral. By 2013, he had obtained a $14 million line of credit that ballooned his medallion debt to more than $20 million. Uber by then was two years into its expansion into New York City, which sparked the deterioration of the value of the medallions that put the squeeze on Cohen’s finances. Nonetheless, Cohen took out a mortgage on a Park Avenue condominium with a third bank that same year. The only problem was that he did not disclose the $14 million line of credit he had already taken out, prosecutors would later note. In November 2014, he refinanced his debt with the first bank by getting a loan from the second bank and a credit union, a move that would later come back to haunt him.
Three months later, an $8.5 million summer home had caught his eye, but his debt stood in the way. The third bank obtained a 2014 financial statement from the second bank about his debt refinancing and asked Cohen about the $14 million line of credit that he had not disclosed in the mortgage application for his condo. Cohen told the third bank that he had never used that $14 million credit line. But “in truth and in fact, Cohen had effectively overdrawn the Line of Credit, having swapped it out for a fully drawn, larger loan shared by Bank-2 and the Credit Union upon refinancing his medallion debt,” prosecutors would later say. Nonetheless, Cohen said he had closed the credit line in November 2014.
The third bank took Cohen at his word and would later give him a $500,000 home equity line of credit. Cohen had said he and his wife were worth $40 million, but that wouldn’t have been enough to secure such credit if he had disclosed the $14 million in outstanding loans and $70,000 in monthly payments due on the medallion debt, according to prosecutors. He also was hiding $4 million in income derived from the medallions from the IRS – and the deteriorating value of his taxi empire was only getting worse.
He was not alone however in his struggles in the industry. A longtime taxi business associate of his, Evgeny Freidman – the so-called ‘Taxi King’ for the hundreds of medallions he once controlled – was also finding that he could not squeeze as much value as he wanted out of taxi medallions, legally or otherwise.
“If Uber is chiefly responsible for driving down the price of taxi medallions, Freidman played a big role in driving it up in the first place," journalist Simon Van Zuylen-Wood wrote in a 2015 Bloomberg News feature on Friedman. "Allow him to explain his strategy: ‘I’d go to an auction, I’d run up the price of a medallion, then I’d run to my bankers and say, ‘Look how high the medallions priced! Let me borrow against my portfolio.’ And they let me do that.’”
Freidman pleaded guilty to a single count of tax fraud in May related to his pocketing of $5 million in per-ride transportation fees. Cohen denied that he had ever been a business partner of Freidman, though Cohen had leased two-dozen of his medallions to a management company controlled by Freidman, Politico reported.
The two men are half of the four people who have been ordered by the TLC to give up their medallion holdings after pleading guilty to crimes, according to the TLC. Both Freidman and Cohen were driven to make money in a declining industry that would eventually catch the attention of prosecutors. While it remains to be see how the guilty plea by Cohen will ultimately affect Trump, the industry as a whole has gone from a steady and lucrative business to one teetering on the brink of extinction, according to Jason Snead, a policy analyst at The Heritage Foundation, who wrote a 2015 study of the New York City taxi cab industry.
“The medallion system that New York has today, really it’s anachronistic. It’s a dinosaur and it needs to be unwound,” he said in a telephone interview. “What we’ve really seen is a resurgence of competition and innovation and dynamism like folks from Uber and Lyft and they have really transformed the landscape in less than 10 years.”