Lyft threatens lawsuit against Morgan Stanley, accusing support of short selling
cnbc.comEven 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-..., 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.
>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-...
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)
Lyft wouldn't be getting upset with Morgan Stanley if all they did was allow minor shareholders who didn't sign agreements to hedge.
Source?
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.
The lock up agreement is publicly available on the SEC’s website (it’s a material contract and therefore required to be filed as an exhibit to the registration statement). The agreement itself is part of the Investors’ Rights Agreement. See section 2.12
https://www.sec.gov/Archives/edgar/data/1759509/000119312519...
Seems like it'll hit the courts eventually and then we'll find out if there's a loophole or not.
Lyft is certainly claiming there isn't one, and the S1 says the same. If the S1 is false they might have a securities fraud case on their hands.
What year agreement do you have?
I also signed one - DM me if you want.
FYI, HN doesn't have DMs - you could put a throwaway email in your profile
Thanks, I thought I had :)
> 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 issue (and, yes, the drafting of the agreement you point to may make this murkier than would generally be the case) sounds like tortious interferenxe. Supposing MS did create a shorting product for Lyft pre-IPO investors, and supposing that the pre-IPO investors are, as a class, prohibited from engaging with that product by contract with Lyft, and supposing MS knew about that prohibition, that would seem to be the issue.
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.
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.
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).
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.
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.
Because strong companies don’t worry much about short sellers. You’ll never see Apple complain about them (and if they do you know Apple is having cash flow problems).
Companies complain about short sellers when they’re having cash flow problems and are dependent on the public markets to raise $ (by issuing new shares or in a bond offering), dto fund their operations. Short sellers can increase the cost of the company to raise money (eg if the company has a bond offering they may have to pay a higher interest rate if tons of shorts effectively lower the share price of the company).
So do you think lock up agreements themselves are a sell signal as well ? They threaten legal action on short selling (even worse than just complaining).
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.
From the article
> tortious interference with the lock-up agreements
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.
? You don't exercise your options if below the strike price. For RSUs, you hope they were issued far below the IPO price.
If things really go sour, you can have massive lawsuits. Discovery process with brokers could expose who shorted.
Some other stories on this:
https://nypost.com/2019/04/05/lyft-threatens-morgan-stanley-... https://techcrunch.com/2019/04/05/morgan-stanley-which-is-un... https://www.theinformation.com/articles/lyft-threatened-morg...
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."
>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
Sounds like they were reducing their economic interest.
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...) 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.
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.
Does that mean pre-ipo investors can sell call options (when available) at the strike price = ipo stock price of $72 ?
Option contracts are not available yet, i think.
They were released on 4/4, I believe. You can purchase them from your broker.
Finance at its best.
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.