Here come the lawsuit threats as I predicted. IPOs that do not hold their price for long are always lawsuit prone. In fact, one can often buy the ones that do not hold their price on the idea that the syndicate desk will have to step in an prop them back up to avoid what is discussed below in this article. Even though I hate the deal, I bought LYFT for a quick pop back to the upside and was out within a day .
Lyft Threatens To Sue Uber's Lead Underwriter For Helping To Crash Its Stock
by Tyler Durden
Sat, 04/06/2019 - 12:35 Print
Desperate to explain the debacle following its recent IPO, when its stock crashed from its opening print of $87, tumbling below the $72 IPO price and then sliding some more for good measure to enter a bear market within 2 days of opening for trade, the newly public Lyft has found a scapegoat: the lead underwriter for the upcoming IPO of its biggest competitor, Uber.
After reading an unverified article in the NY Post, which said that Morgan Stanley was marketing a short-selling product that "appeared to offer Lyft’s pre-IPO shareholders a way to get around lockup agreements that prevent them from selling for at least six months after the IPO" and was allegedly depressing the Lyft stock price according to the Information, and facing investor ire for a bungled IPO, Lyft threatened the Times Square-based investment banking giant with legal action, demanding in an April 2 letter that the bank stop marketing the controversial product.
Whether or not Morgan Stanley was doing anything illegal, or anything at all for that matter, is unclear: according to the original Post report, "Morgan Stanley, a lead underwriter for Lyft rival Uber, is one of the brokerages selling a “short” product to pre-IPO investors."
What is even more ironic is that the swap was only made possible due to deficiencies in the Lyft IPO lockup terms:
Driving the unusual bets is language in Lyft’s lock-up agreements that has hedge funds and other early Lyft investors giving themselves a green light to make limited “short” bets, which make money on a stock’s decline.
The goal is to position the bets in such a way that investors don’t benefit from a decline or a rise in the stock. But simply to lock in their IPO gains, which were significant.
“If I can lock in $70 now, I’m going to do that,” said an investor.
“Lyft made a mistake,” one investor who bought into Lyft shares prior to the IPO told The Post. “People who own the stock are allowed to hedge their positions. You are not allowed to reduce your economic interest.”
In other words, while not explicitly selling, many of the investors - confident the stock would tumble - precipitated precisely such a tumble with their own hedging actions, reportedly facilitated by Morgan Stanley. The result, according to Lyft, was the plunge in the stock. in the hours and days following its IPO.
We say "supposedly" because Morgan Stanley denies: bank spokesman Mark Lake told TechCrunch that the New York Post report was flat-out wrong:
"Morgan Stanley did not market or execute, directly or indirectly, a sale, short sale, hedge, swap, or transfer of risk or value associated with Lyft’s stock for any Lyft shareholder identified by the company or otherwise known to us to be the subject of a Lyft lock-up agreement.
Our firm’s activities have been in the normal course of market making, and any suggestion that Morgan Stanley engaged in an effort to apply short pressure to Lyft is false.”
So to summarize: having read an anonymously sources and unconfirmed piece (in the NY Post of all places) that gave Lyft management a possible explanation for the stock drop, an explanation that relied on management's own sloppy lockup language, the car-hailing company could barely wait before sending out an angry letter to Morgan Stanley, lead underwriter of the upcoming IPO of Uber, demanding it cease and desist doing... whatever it was doing. Which according to Morgan Stanley was nothing.
As TechCrunch notes, whether the story ends here remains to be seen. The Information has updated its original post to include part of Morgan Stanley’s statement of denial, but it continues to report that, according to one of its sources, Morgan Stanley had been calling early Lyft investors for weeks during its roadshow and pitching them on a short-selling transaction that would enable them to lock in gains, regardless of the lockup.
Assuming Morgan Stanley is telling the truth - which is very likely with its on-the-record denial - the question then is who were the "three sources close to the situation" that fed the NY Post the misinformation.
As for the suggestion that Uber somehow tried to sabotage the Lyft IPO (which apparently Lyft management was quite capable to do on its won with its sloppy S-1 drafting), that may be a stretch considering the very bitter taste in investors mouths following the biggest "decacorn" IPO in years, and the fact that this will surely reflect quite poorly on demand for Uber's own (Morgan Stanley-managed) upcoming IPO, which will reportedly be valued at over $100 billion despite losing $1.8 billion in 2018, and amount that is growing with every passing quarter.
As for Lyft, its damage control scramble may be too late: the good news is that for now, the cost of shorting LYFT stock is about 100%, which makes it prohibitively costly to engage in a lengthy short. The bad news is that the cost of shorting LYFT stock is about 100% because everyone wants to do it; and somehow we doubt Lyft can sue all the shorts.
https://www.zerohedge.com/news/2019-04-06/lyft-threatens-sue-ubers-lead-underwriter-helping-crash-its-stock |
