Lyft Inc. is threatening to sue Morgan Stanley, accusing the merchant bank of promoting short-selling to investors who were subject to lock-up agreements.

Short-selling is the sale of shares that the seller has borrowed in the expectation of being able to acquire them later at a lower price, the profit coming from the price difference between the two.

Since it involves the seller betting on the price of a given share declining, it also can have a negative impact on the price of the given shares as well. In Lyft’s case, its share price fell below its initial public offering price on its second day of trading Monday and took the whole week to recover.

Whether short-selling alone accounts for all of the company’s price volatility is not known, but Lyft seems to think it played a major role.

Although short-selling itself is not illegal, if Morgan Stanley was allowing pre-IPO investors in Lyft to bet against the company’s stock, it may have fallen afoul of securities regulations. Many of those investors would have been subject to lock-up agreements that prohibited them from betting against the company in the wake of its public stock offering the New York Post reports.

Complicating things further, Morgan Stanley is also a lead underwriter the forthcoming IPO from Lyft’s main rival Uber Technologies Inc.

Morgan Stanley has denied the allegations, telling CNBC that “our firm’s activity has been in the normal course of market-making, and any suggestion that Morgan Stanley has engaged in an effort to apply ‘short pressure’ to Lyft is false.”

Self-regulatory body The Financial Industry Regulatory Authority is said to already be investigating the claims and the U.S. Securities and Exchange Commission may soon be involved as well given that the allegations full under its purview.

Any court action from Lyft or action from the SEC would likely entail a demand that Morgan Stanley hand over a list of its clients who were short-selling stock to identify any investors who were subject to lock-in provisions. Those investors could then potentially be subject to litigation themselves.

Photo: Wikimedia Commons