
Lyft threatens lawsuit against Morgan Stanley, accusing support of short selling - gabbo
https://www.cnbc.com/2019/04/06/lyft-is-threatening-litigation-against-morgan-stanley-accusing-the-firm-of-supporting-short-selling.html
======
fnpiop
Even though Morgan Stanley denies short-selling, I'm really trying to
understand the legal issue they'd be under even if they were.

The various news articles are terribly written (esp. the original nypost
article), so here's what I can tell as someone with some knowledge of Lyft
stock:

* Lyft's market standoff agreement is written loosely. Often such agreements enumerate a wide range of prohibited behaviors with the underlying stock during the lockup, banning all sorts of direct or indirect sells, hedges, hypothecation, etc. of the underlying stock. Lyft merely bans "selling or otherwise disposing" the company stock.

* Lyft has claimed (in emails to investors) that any transaction that transfers "economic interest" of the stock are prohibited.

So:

1\. Via "[https://nypost.com/2019/04/05/lyft-threatens-morgan-
stanley-...](https://nypost.com/2019/04/05/lyft-threatens-morgan-stanley-with-
legal-action-over-ipo-claims/"), It looks like Morgan Stanley might have
created a vehicle/security that inversely tracks Lyft. So the Lyft investors
aren't per se shorting Lyft; MS is. This toes the line (as it is an indirect
short), but I'd love to see legal experts weigh in.

2\. Even then, I'm finding Lyft's position hard to rationalize. How does an
agreement to ban sales bar any form of economic interest reduction? (e.g.
buying puts, writing calls, hypothecating, etc.) I would think investors could
execute equity collars on their Lyft position all they want per the agreement
(and Morgan Stanley could be their counter-party), but Lyft is claiming
otherwise.

~~~
ikeboy
>It says in relevant part that “our directors, our executive officers and
holders of a substantial portion of our capital stock and securities
convertible into our capital stock have entered into lock-up agreements
…pursuant to which each of these persons or entities, with limited exceptions,
for a period of up to 180 days after the date of this prospectus, may not,
without the prior written consent of J.P.Morgan Securities LLC, (i)offer,
pledge, announce the intention to sell, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of our Class A common stock or any
securities convertible into or exercisable or exchangeable for our Class A
common stock ... or (ii)enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of ownership of the
Class A common stock or such other securities.” That captures not only share
sales but also options, swaps and other hedging transactions, whether settled
in cash or stock, and it is pretty standard language.

From
[https://www.bloomberg.com/opinion/articles/2019-04-04/token-...](https://www.bloomberg.com/opinion/articles/2019-04-04/token-
sales-have-some-rules-now#footnote-5)

~~~
fnpiop
EDIT: I actually read the S1 excerpt wrong.

Update: Note that it is carefully worded: "Our directors, executive officers
and holders of a substantial portion of our capital stock and securities
convertible into our capital stock".

What probably happened is that the company required holders of only a
"substantial portion" of stock to sign updated agreements with the
underwriters. Neither I nor any of my Lyft stockholding friends ever entered
into such an agreement (and Lyft isn't claiming that we, as minor
shareholders, did). So as far as I can tell, nothing blocks us from hedging
with Morgan Stanley or otherwise.

(Original post was thinking the S1 is wrong; it is not)

~~~
ikeboy
Source?

~~~
fnpiop
Unfortunately, the actual agreements generally aren't public information. I
can't provide mine without risk of loss of anonymity.

Yes, this is a lame answer, but any viewer who has Lyft stock or has friends
that do can verify for themselves.

~~~
gjap1zq
What year agreement do you have?

I also signed one - DM me if you want.

~~~
ikeboy
FYI, HN doesn't have DMs - you could put a throwaway email in your profile

~~~
gjap1zq
Thanks, I thought I had :)

------
rongenre
Wow, when companies complain about short sellers, it's generally pretty dumb
(and a sell signal), but this sounds like MS was trying to help people get
around lockup agreements which is pretty bad behavior if true.

~~~
wyattpeak
For someone who knows nothing about shares, why is it a sell signal? I'd
always assumed the issue was just that it was juvenile, not necessarily a
cause for concern.

~~~
rongenre
Because short sellers increase liquidity, and help the market determine an
accurate price for the company.

Also short selling is _far_ more risky than taking the long side. On the long
side, your downside is the money you invested (if the price goes to zero). On
the short side, your downside is infinite (if the price keeps going up).

~~~
tuesdayrain
Shorters also apply downward pressure that might not exist naturally, since
they're selling borrowed stock. AFAIK they could potentially short more stock
than is even issued by the company. It's understandable why some companies
would be irritated by people doing that.

~~~
malshe
You are talking about naked short selling. I think except by a few vocal
opponents (e.g., Overstock CEO) generally naked short selling is not
considered a major concern in the market as Long as it is not abusive.

------
chollida1
So I can see each pre I’ll investor in Lyft having a contract that prohibits
shorting, though there are reports that the language is week enough that it’s
possible that shareholders might actuallly be able to hedge their positions.

But what possible charge could Lyft bring against ms?

It’s not illegal for an investment bank to short a company nor is it illegal
for them to write a bespoke contract that let The holder lock in a price for
ther shares as long as they weren’t the ipo underwriter.

It’s also not uncommon for a hedge fund to buy a bespoke put on a company
Colton an investment bank, I mean writing this type of instrument is a part of
their trading desks business.

Also this fails a simple occam’s razor test once MS denied this.

~~~
iakh
From the article

> tortious interference with the lock-up agreements

~~~
kerng
I always wonder how these can be enforced anyway, same for employees.
Employees carry a huge risk in case the Lyft stock falls flat, they still have
to pay all the taxes and company might not withhold enough (dont have any
details on that, but it's rather typical) - will be interesting to watch how
this goes down.

~~~
sjg007
? You don't exercise your options if below the strike price. For RSUs, you
hope they were issued far below the IPO price.

------
NelsonMinar
Some other stories on this:

[https://nypost.com/2019/04/05/lyft-threatens-morgan-
stanley-...](https://nypost.com/2019/04/05/lyft-threatens-morgan-stanley-with-
legal-action-over-ipo-claims/) [https://techcrunch.com/2019/04/05/morgan-
stanley-which-is-un...](https://techcrunch.com/2019/04/05/morgan-stanley-
which-is-underwriting-ubers-ipo-is-denying-reports-that-it-marketed-a-short-
selling-product-to-lyft-investors/)
[https://www.theinformation.com/articles/lyft-threatened-
morg...](https://www.theinformation.com/articles/lyft-threatened-morgan-
stanley-with-legal-action-over-short-selling-trades)

The NYPost story includes the detail "We bought stock in a special acquisition
vehicle and then the individual investors in the special acquisition vehicle
shorted shares through Morgan Stanley ... Pre-IPO investors are contractually
barred from reducing their “economic interest” in Lyft for six months, which
includes shorting the stock. But sources say Lyft investors worked around the
lock-up language by positioning the bets so that they won’t benefit from a
decline or a rise in the stock. Instead, they simply lock in their IPO gains,
which were significant."

~~~
fnpiop
The nypost's articles are being written by reporters who don't understand what
they are writing. The same authors wrote the original article
("[https://nypost.com/2019/04/01/early-lyft-investors-are-
betti...](https://nypost.com/2019/04/01/early-lyft-investors-are-betting-on-
the-new-stock-falling/")) which is full similar errors.

Obviously, if the investor engages in a transaction that leads to them to not
benefiting from a rise in the stock, they've reduced their economic interest!

The answer (as I note elsewhere) is that the investors believe Lyft's lock-up
language does not per se bar them from reducing "economic interest". The loose
agreement only bars selling and presumably short-selling shares.

~~~
NelsonMinar
Hacker News: where anonymous commenters ask you to believe them over the
professional financial reporter.

You've put your finger on the core of the legal dispute, what "reducing
economic interest" means. The reporter did an excellent job explaining that.
Now it'll be up to a court to figure it out.

------
miohtama
The underlying issue is that Lyft stock price is too expensive and earlier
professional investors know it. They want to hedge their position before Lyft
bubble bursts.

If Lyft IPO price had been lower (... or more reasonable) this problem would
not exist.

