Hedge Funds Pursue Porsche in German Court

Investing

by Michael Mayday

In October 2008, Porsche announced that it was looking to acquire a 75 percent stake in Volkswagen, despite denying previous reports that it was seeking a majority stake in March of the same year. Porsche ultimately did buy that 75 percent stake, but in doing so, it also drained the wallets of hedge funds managing money based on the belief that the company wouldn’t try to take over VW.

Porsche made $7.5 to $15 billion on the share price of VW over the days following its announcement. The hedge funds, in turn, suffered losses of over $1 billion.

Those hedge funds didn’t appreciate being misled, and, in response, sued the luxury car maker.

Hedge Funds Launched a Lawsuit

The hedge funds that brought a lawsuit against Porsche were using a ‘short’ tactic to make money off of the stock market. A short sale occurs when the investors sell stock they’ve borrowed from brokers at a high price, expecting the value to decrease so they can repurchase the stock at a lower price, making money from the difference. Porsche is accused of engineering a short squeeze – essentially, when a short sale goes wrong. Instead of decreasing in value, the stock begins to increase. In order to cover their losses, the investors must buy the stock at a higher price, which only makes the stock value increase further.

In 2010, a group of New York hedge funds including Greenlight Capital LP, Tiger Global LP, Glenhill Capital LP, Viking Global Equities LP and Glenview Capital Partners LP filed a lawsuit against Porsche, accusing the company of cornering the market and withholding information from investors. When Porsche released the news that they had secretly acquired a majority of the company, Volkswagen’s stock experienced a quick spike in value and the panic-buying briefly brought Volkswagen to the biggest company in the world by stock market value. The short squeeze caused the hedge funds involved to experience major losses of over $1 billion.

From New York to Germany

On August 6, 2012, shortly after Porsche and Volkswagen formed Integrated Automotive Group  to help integrate Porsche into VW, New York State Supreme Justice Charles Ramos ruled that the hedge funds could proceed with their lawsuit in New York. Four months later, that ruling was reversed and Porsche won a dismissal of the suit. The five justice NY appeals court unanimously decided that “Porsche met its heavy burden to establish that New York was an inconvenient forum.”

Porsche offered the hedge funds 90 days to refile the suit, this time in Germany, where they’ve had successes in the past. Seven hedge funds are pursuing the lawsuit in Germany for $2.59 billion in damages: these include Elliott Associates LP, Elliott International LP, Liverpool LP, Perry Partners LP, Perry Partners International Inc, DE Shaw Valence International Inc and York Capital Management Europe UK Advisors LLP. In April 2013 the case was postponed until June 17, when the Braunschweig court will decide if the case should be moved to a specialist court in Frankfurt or Hanover.

Optimistic Outlook

Martin Winterkorn, CEO of Porsche SE and Volkswagen AG, said that the company is optimistic of its prospects, and, in an interview with Bloomberg, said that the company “continue[s] to view all pending lawsuits against Porsche SE as unfounded.” Last year a German court threw out two other suits related to the attempted takeover of VW. Porsche hopes this outcome will be repeated with the new lawsuits, saying that the company “considers the alleged claims to be without merit and will respond by filing a motion to dismiss.”

Trouble for Porsche

On June 4, however, ex-CFO Holger Haerter was found guilty of fraud and market manipulation for his part in the 2008 scandal.

As the worldwide financial system began to slow in late 2008, the banks who had loaned money to Porsche started calling in their debts, and Porsche was thrown into a liquidity crisis. After the failed takeover and almost $13 billion in debt, Porsche agreed to acquisition by Volkswagen and only survives as a company through its share in VW stock.

 

Max Earey / Shutterstock.com

 

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