MANHATTAN (CN) – Porsche cornered the market on Volkswagen stock and investors who were short-selling it scrambled to cover their short positions as prices “spiraled higher and higher,” 16 investment firms say in a federal complaint.
Lead plaintiff Elliott Associates says Porsche kept its intentions hidden to keep the share price from rising as it acquired a controlling interest in VW. Porsche achieved its aim by outright “lying” and by acquiring options contracts that “allowed it to ambush the market once it had amassed control over enough shares,” according to the complaint.
When Porsche went public with its majority position in March 2008, it had acquired “nearly 75 percent of VW shares through outright positions and options,” the plaintiffs say.
The New York Times reported that Porsche caused a “short squeeze of historic proportions,” and the plaintiffs lost “tremendous amounts of money,” according to the complaint.
Before “all hell broke loose,” the plaintiffs say, they were short-selling VW stock – borrowing shares with the obligation to repurchase them in the future.
The short sellers had bet that the stock would decline, but shares rose after Porsche’s announcement, because demand increased and there were fewer shares than market prices indicated, according to the complaint.
If Porsche had not been “keeping the prices of VW shares artificially low,” the plaintiffs say, the risk in shorting VW shares would have been apparent.
In the months leading up to Porsche’s announcement, the company engaged “in a series of manipulative derivatives trades,” according to the complaint.
Porsche claimed it might hold a simple majority in VW but that a takeover was “totally unrealistic,” the plaintiffs say. They also claim that Porsche misrepresented options contracts that it should have disclosed and evaded counterparty disclosure requirements.
The plaintiffs say Porsche targeted U.S. investors for its misinformation. Porsche translated all press releases regarding VW, in which the company claimed to not be interested in acquiring a controlling share, into English and posted the statements on its Web site.
“Defendants knew that New York-based investment managers would rely … on defendants’ fraudulent misstatements and that the hedge funds they advised would be the primary victims of defendants’ fraud and manipulation,” according to the complaint.
Defendants Porsche, its CEO Wendelin Wiedeking and former vice president of finance Holger Haerter are accused of securities fraud and market manipulation.
The investment firms are represented by David Parker with Kleinberg, Kaplan & Wolff, and by Philip Beck with Bartlit Beck & Herman of Chicago.