Investors Lose Suit Over Porsche’s Short Squeeze

MANHATTAN (CN) - A federal judge dismissed a $2 billion lawsuit filed by a group of 39 hedge funds, claiming that Porsche cornered the market on Volkswagen stock in the 2008 takeover, in favor of an investigation by German securities regulators.

Elliott Associates and Black Diamond Offshore were the lead plaintiffs in the consolidated action, first filed in January and May, respectively, against Porsche Automobil Holding, its former CEO Wendelin Wiedeking and former vice president of finance Holger Haerter.

Shortly after the cases were consolidated in June, the Supreme Court ruled in Morrison v. National Australia Bank that American securities fraud law only applies to domestic investment deals.

The investors claimed they were short selling VW stock - borrowing shares with the obligation to repurchase them in the future - as Porsche lied about its takeover plans.

The short sellers had bet that the stock would decline, but shares rose after Porsche announced it had secretly acquired a majority position because demand increased and there were fewer shares than market prices indicated.

Shareholders say that, in one week of trading, the fraud caused investors overall to lose an estimated $38.1 billion while Porsche amassed $7.6 billion in trading profits.

To nullify the effect of the Supreme Court's ruling in Morrison, the investors claimed in their amended complaints that they signed swap agreements governed by New York law.

U.S. District Judge Harold Baer Jr. disagreed on Thursday, finding that the "narrow reading" argued in the complaints sidestepped the justices' intent to avoid interference with foreign securities law.

He added that the investors' swaps "were the functional equivalent of trading the underlying VW shares on a German exchange."

"Notably, neither complaint appends a copy of any swap agreement, and none of the plaintiffs spell out the identity of a counterparty," Baer wrote.

"Here, the swap agreements were transacted with undisclosed counterparties who may well have been located outside the United States. Both the issuer of the reference security, VW, and the perpetrator of the alleged fraud, Porsche, are located in Germany."

Baer dismissed the securities law claims with prejudice, and dismissed the state-law fraud claims without prejudice.

"For me to determine the merits of plaintiffs' common law fraud claims would require the court to analyze German law governing securities fraud, and yet Germany provides for exclusive jurisdiction of securities fraud cases in its own courts, making any judgment from this court unenforceable in Germany," Baer wrote.

He added that he had been asked to dismiss the case by the German Consulate in New York, which wrote to inform him of ongoing investigations by German securities regulators into Porsche's accumulation of VW shares.

The ruling also applies to four newer investor lawsuits against Porsche, including two filed in October by Viking Global Equities and Parcentral Global Hub, respectively.

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