Securities and Exchange Commission v. Medallion Financial Corp.

Background

The Securities and Exchange Commission sued Medallion Financial Corp. and other defendants. Medallion and Andrew Murstein moved to dismiss the amended complaint and submitted exhibits through a supporting affidavit. Lawrence Meyers and Ichabod’s Cranium, Inc. filed a separate motion to dismiss and incorporated the Medallion-Murstein papers by reference.

The SEC moved to strike several groups of exhibits: filings that the amended complaint did not substantially rely on; news articles and law-firm alerts; documents concerning purported valuations of and offers for Medallion Bank; and excerpts from investigative testimony.

Court’s analysis

The court explained that, on a motion to dismiss, it generally considers whether the complaint’s factual allegations, assumed to be true, would support legal relief. It may consider the full text of documents incorporated into the complaint or integral to it. But a passing reference or limited quotation is not enough; incorporation requires a clear, definite, and substantial reference to the document.

The court held that the challenged documents were not integral to the amended complaint and were not incorporated by reference. It also stated that documents considered on a motion to dismiss generally should not be considered for the truth of statements they contain. In the securities-fraud context, the court may examine disclosure documents to determine what they said, but not to prove that their contents were true.

The SEC filings were not substantially cited in the amended complaint, and defendants relied on some of them to dispute materiality and scienter. The news articles were not mentioned in the complaint and were offered to establish facts. The valuation and offer materials were referenced only in connection with allegations about Murstein’s conduct and alleged misrepresentations, rather than the terms of those documents themselves. The investigative testimony excerpts did not bear on whether the complaint adequately pleaded the claims.

Ruling

Judge Kaplan granted the SEC’s motion to strike, Docket 66, in all respects. He denied Medallion and Murstein’s motion to dismiss, Docket 59, and Meyers and Ichabod’s Cranium, Inc.’s motion to dismiss, Docket 57, without prejudice to renewal on papers that do not refer to any stricken exhibits. The opinion therefore did not resolve the underlying claims on the merits.