Takeover tangle

Traders and hedge fund managers hate the weekends because they can't take react immediately to corporate announcements until trading floors reopen on Monday.

Sunday, October 26, 2008 was a particularly bad day for 35 American hedge funds. That was the day German sports carmaker Porsche announced that it owned 42.6 percent of Volkswagen's common stock and options for another 31.5 percent - bringing its total stake in the company to 74.1 percent. The announcement then declared Porsche was seeking to obtain 75 percent of VW shares - a plan that eventually backfired.

The following morning saw a frenzy of trading activity. Hedge fund managers had long been betting that the price of VW stock would fall. The financial crisis caused demand for cars to fall in the US, driving down American automakers' share prices. They figured it was only a matter of time until German carmakers suffered a similar fate. As a result, their funds were borrowing VW shares and selling them on in the hope they could buy them back later at a lower price - a speculative strategy known as short selling.

But Porsche's weekend announcement made it clear that fund managers had sold more than double the number of VW shares actually available on the market. The news drove VW's stock price up from 290 euros to 1,005 euros per share, making it the world's most valuable company for a short period of time. The Financial Times estimates that hedge funds lost about 15 billion euros ($19 billion) in two days of trading as a result.

Transatlatic battle

Now the funds want Porsche to pay them more than 1.5 billion euros ($2 billion) in damages. Lawyers representing the hedge funds told a New York court that Porsche committed securities fraud by leading investors to believe it was only seeking a 51-percent stake in VW.

Porsche's defense team is due to file a petition to dismiss the lawsuit on Wednesday, according to German media. Analysts expect Porsche to argue that it was only required to publicly disclose its takeover plans once they were approved by the board - and that that had not been the case prior to October 26, 2008.

The hedge funds' claims may be helped by the fact that German prosecutors in the city of Stuttgart are also examining claims that Porsche managers manipulated the markets. Investigators are trying to establish whether former Porsche chief Wendelin Wiedeking and his financial director Holger Haerter influenced stock prices by passing on insider information or misleading investors about the Porsche's plans to increase its stake in VW.

The American plaintiffs will have to be patient if they want to rely on evidence from Germany, however. The Stuttgart prosecutors' preliminary findings aren't due to be released until the end of 2010 or early 2011.

Author: Rolf Wenkel (sje)
Editor: Cyrus Farivar