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Porsche Facing More Legal Trouble

Further challenges to VW/Porsche merger.

by on Jan.03, 2012

The takeover attempt crafted by former Porsche CEO Wendelin Wiedeking now haunts the German maker.

A group of investment funds has filed a new lawsuit against Porsche Automobile Holding SE, seeking to recover approximately, $3.2 billion in losses suffered during Porsche’s failed fort to takeover Volkswagen AG in 2008.

The complaint, filed in district court in Stuttgart, alleges Porsche gained control over the price of VW common stock as it secretly built enormous derivative positions covering almost all of VW’s freely traded shares.

In the next step in the scheme, Porsche triggered a massive short squeeze, and finally released billions of Euros worth of shares for its own profit.

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The web site Investopia describes a short squeeze this way: “If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher.”

One of the focal points of the complaint is Porsche’s press release that triggered the short squeeze.

On October 26, 2008, Porsche SE suddenly revealed the extent of its huge derivative position and claimed control over 74.1% of VW common stock. For the first time, after strong denials in the weeks and months before, Porsche confirmed that it wanted to cross 75% and implement a domination agreement which would give it full control over VW and its liquidity. This resulted in what the New York Times called “a short squeeze of historic proportions.”

The plaintiffs in the new suit filed in Stuttgart, where Porsche’s headquarters is located, are a group of investment funds, mostly from the United Kingdom, that were eager to cash in on action surrounding Porsche’s bid for VW

Plaintiffs also filed an arbitration application regarding VW, two members of the VW supervisory board and one member of the management board of VW.

A group of New York hedge funds had filed lawsuits against Porsche last year, claiming the German maker had quietly cornered the market on Volkswagen stock.

The lawsuits in the U.S. claim that Porsche’s takeover bid resulted in losses of $1 billion as it discreetly bought up every freely traded share of Volkswagen stock in an attempt to take over the company in 2008. When Porsche revealed what it had done, Volkswagen stock prices leapt. The hedge funds, meanwhile, had bet big that Volkswagen shares would actually see a dip, and the reversal caused major losses.

Porsche, however, walked away with a hefty profit from the trades but also left the German sports-car maker saddled with huge debt just as the demand for new vehicles softened. The maneuvers also made it easier for VW to turn the tables and negotiate the takeover of Porsche the following year.

That merger has, however, been put on indefinite hold as a result of the ongoing litigation, VW reluctant to complete the deal until it sees whether Porsche might ultimately be liable for billions of dollars in settlements.

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