MANHATTAN (CN) - Porsche cornered the market in Volkswagen shares and committed "a short squeeze of historic proportions" by denying that it planned to take over the company, according to two complaints in Federal Court. Delaware-based Viking Global Equities claims, "This massive fraud caused investors, including Viking, to lose an estimated $38.1 billion in less than one week of trading in late October 2008, while Porsche cleared over $7.6 billion in trading profits during the same week."
Viking Global Equities and two subsidiaries say they expected overpriced Volkswagen shares to drop since the automaker's largest shareholder, Porsche, made "repeated public assurances between at least March 2008 and October 2008 that it did not currently own, and did not intend to acquire, a controlling interest in VW, meaning at least 75 percent of the VW shares."
Viking says it entered into short positions by selling VW shares into the market in 2008 with a commitment to repurchasing the shares in 2009 - and that it hoped prices would have fallen by then.
"Viking therefore understood that if Porsche were ever to attempt to take control of VW by purchasing the remainder of the available VW shares in the market, it [Viking] could suffer potentially cataclysmic losses in an ensuing 'short squeeze,'" according to the complaint.
"Viking entered its short positions in direct reliance upon Porsche's express denial that it would attempt to acquire control of VW during the relevant time period, as well as the integrity of the market and market price of VW shares. Viking would not have entered its short positions in VW shares if Porsche had stated it was planning to attempt to acquire control of VW in the relevant time period."
When Porsche revealed its takeover plans in October 2008, announcing that it had quietly amassed 74 percent of the outstanding shares of VW, the "stunned" market began to scramble for VW shares, which "skyrocketed to unprecedented levels, with no guarantee of an end in sight," according to the complaint.
Viking claims it accounted for more than $390 million of the $38.1 billion of losses that investors sustained within one week of Porsche's announcement.
In a separate complaint, a Bermuda-based investor, Parkcentral Global Hub, claims it lost $90 million for the same reason.
Porsche began taking steps to secretly corner the market in VW shares in March 2008, the investors claim.
"Through careful market manipulation and false statements, Porsche convinced investors to believe that the VW shares were overvalued, inducing them to enter into short sales of VW shares," according to Viking's complaint. "These short sales in turn allowed Porsche to acquire more and more VW shares, since unbeknownst to the short sellers, Porsche was directly and indirectly acquiring borrowed VW shares that the short sellers were selling in the market as part of its secret scheme to take control of VW."
Viking says it thought there would be enough VW shares in the market to cover the short positions it was taking, but "due to Porsche's fraud, calculated deception and manipulation, Viking and the market as a whole dramatically underestimated the supply of VW shares outside of Porsche's control."
The investors demand hundreds of millions of dollars in damages for securities fraud, common-law fraud, market manipulation, and unjust enrichment. Their lead counsel is Rick Werder with Quinn Emanuel.
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