MANHATTAN (CN) – Porsche “corner(ed) the market in VW stock” in a “massive short squeeze,” driving up the share price after inducing investors to sell short, costing other investors more than $1 billion, a group of hedge-fund traders claims in New York Supreme Court.
Led by Glenhill Capital, the New York-based investors say Porsche was “unapologetic and astonishingly frank about how it intentionally misled investors,” and that they “lost more than $1 billion as a direct result of the fraud.”
A federal judge dismissed a similar, previous complaint, in January.
In the 66-page complaint, the six groups of funds, 23 in all, claim Porsche cornered the market on Volkswagen stock in an attempt to take over the company by buying up 75 percent of VW shares. They claim that Porsche deceived hedge-fund investors, denying that it sought to raise its direct stake in VW above a simple majority and concealing its strategy to achieve domination.
“Porsche lured the plaintiffs into a trap, making plaintiffs believe VW shares were overvalued while hiding from plaintiffs the risk of a massive short squeeze that would send the price skyrocketing several hundred percent,” according to the complaint.
The complaint defines a short squeeze by citing a 2005 federal ruling in Rocker Mgmt. L.L.C. v. Lernout & Hauspie Speech Prods. N.V.: “In a short squeeze, ‘the price of a stock is inflated to levels at which the short seller can no longer accept the costs associated with maintaining the short position, or at which the risk of loss is increased beyond acceptable levels, forcing the short seller to “cover” his position. This has the dual effect of removing the short seller from the company’s market and further increasing demand for the company’s stock, as the short seller must purchase the inflated shares from the limited amount available in the public market.”
Before the onset of the 2008 financial crisis, Porsche led investors to believe that the demand for VW shares was lower than market prices indicated, the complaint states. The plaintiff short-sellers had bet that the price of VW stock would fall. They say they lost more than $1 billion when “Porsche sprung the trap on Oct. 26, 2008 … [and] revealed the vast extent of its holdings of VW shares and lifted the veil on its plan to take over VW. Porsche’s intended consequence of its disclosure was a short squeeze in which the price of VW shares shot upwards. The price increase protected the value of Porsche’s huge position in VW shares, the value of which, as described further below, had been slipping with prices in stock markets around the world as the financial crisis of 2008 picked up speed. As a result of Porsche’s short squeeze, Porsche made massive profits at the expense of plaintiffs, who lost tremendous amounts of money covering short positions at artificially high prices.”
The investors claim that “no plaintiff would have taken a short position in VW shares short had it known that Porsche was cornering the market in VW shares,” and that “both the supply of and demand for VW shares were skewed by Porsche’s fraud.”
Porsche planned as early as February 2008 to buy up 75 percent of VW’s shares, the plaintiffs say. They claim the company discreetly bought up freely traded VW stock and entered into options contracts with investment banks “as a means to acquire control over VW shares, not as a means to benefit, in cash, from a rise in the price of VW shares.”
The investors seek punitive damages for fraud and unjust enrichment. The six groups of plaintiff funds are Glenhill, Glenview Capital, Greenlight Capital, GCM Little Arbor, Royal Capital, and Tiger Global.
They are represented by Philip Beck with Bartlit, Beck, Herman, Palenchar & Scott of Chicago.