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Hedge funds’ $1bn lawsuit says Porsche lied on VW ambition

Date: Tuesday, January 26, 2010
Author: Christine Seib, Times Online

American hedge fund managers sued Porsche and two of its former top managers yesterday for more than $1 billion (£620 million), in what may be one of the biggest damages claims ever received by a German company.

Four fund managers — Elliott Associates, Glenhill Capital Management, Glenview Capital Management and Perry Capital — accused the sports car manufacturer, its former chief executive and its former chief financial officer of repeatedly lying about their intention to take over Volkswagen.

The fund managers claimed that they had lost more than $1 billion because they were shorting VW stock in October 2008 when Porsche surprised the stock market by revealing a 75 per cent stake in VW, sending the Beetle maker’s shares rocketing.

Phil Beck, the funds’ attorney, said: “Porsche should be held accountable in a court of law. We’ll do whatever it takes to make sure that the rule of law is upheld.”

Other VW investors are expected to join the lawsuit, which was filed in New York, boosting the value of the claim to as much as $10 billion.

A spokeswoman for the funds said that they had tried to negotiate an out-of-court settlement with Porsche and its former executives. “Having been rebuffed, however, this suit became the only remaining avenue for the funds to protect their rights,” she said.

A Porsche spokesman said that the company rejected the claim, adding that Porsche had “always abided by current capital markets law”.

An investigation by Porsche into the conduct of Wendelin Wiedeking, its former chief executive, and Holger Härter, its former vice-president of finance, found no wrongdoing, the company said last December.

Porsche raised its stake in VW by increments between 2005 and 2008 and, according to the lawsuit, by February had decided that it wanted to own a controlling stake of at least 75 per cent. Porsche hid its rising interest, however, by buying part of the stake through cash-settled stock options that did not have to be declared under German financial markets rules. At the same time, Porsche repeatedly denied that it intended to take over VW, insisting that it wanted only an “innovative and efficient automotive alliance”.

The American hedge funds, confident that no takeover that would drive up VW’s shares was imminent, were selling borrowed VW shares, in the hope of buying them back more cheaply at a later date and pocketing the difference, in what is known as a short sale. However, on October 26, 2008, Porsche revealed that it had put together a 75 per cent holding in VW and intended to acquire the company.

The surprise takeover statement sent VW shares up, prompting short-sellers to unwind their bets. Because there were more VW shares on loan than were available in the market, the short-sellers’ scramble to buy what little VW stock was available drove the shares’ price higher and higher.

The hedge funds were caught in a “massive short squeeze”, the lawsuit said. On October 28, VW shares soared above €1,000 each, briefly making the carmaker the most valuable company in the world.

The American funds lost more than $1 billion when forced to buy VW shares at the inflated price in order to meet their obligations to return the shares they had borrowed. Porsche profited from the squeeze by selling some of its secretly aquired stock.

Porsche’s takeover of VW failed and the two are now working on a merger expected to be completed in 2011.

German regulators studied Porsche’s actions, but said that they found no evidence of market manipulation. State prosecutors are investigating the affair.