Porsche Drives Hedge Fund Crazy

Porsche chairperson Wendelin Wiedeking, along with chief tactician Holger Härter, had a plan to control Volkswagen. It made sense, too. After all, VW sells 60 times as many cars as Porsche, and shares were available at a rate that made sense for both companies.

It made sense in 2005, and when Wiedeking announced it to the world, it generated a lot of excitement and a great deal of subsequent market action. By 2008, Porsche had 42.6 percent of all VW shares, and there was a sound plan in place to hold 75 percent by the end of 2009.

Then the world economy changed in a big way, and the financial institutions involved were no longer keen on providing Wiedeking with the money necessary to complete the transaction. Porsche experienced an immediate liquidity crisis, and then merged with VW, becoming the company’s tenth brand, in order to survive.

This change of course had ramifications throughout the financial world. Some hedge funds that sold on VW or invested aggressively in Porsche based on the acquisition were hit particularly hard. Now, seven of them have filed a lawsuit against Wiedeking and Härter for approximately €1.8 billion.

The lawsuit asserts that the management at Porsche, specifically Wiedeking and Härter, actively misled the market. In other words, the hedge funds are accusing Porsche of misleading the public initially and then staying the course publically even after it knew that it has shifted gears to a merger with VW.

This is not the first suit by these hedge funds. The first was filed in Hanover in 2012 and targeted directly at Porsche SE. This civil suit, on the other hand, targets the board members rather than the company.

The problem here, and where there may be a basis for these lawsuits, is the chain of events. Porsche had been buying VW shares for three years prior to admitting to it. In fact, they actively denied it, and some hedge funds were short-selling VW stock based on those denials. When Porsche merged with VW, people like Wiedeking made a significant amount of money, and those hedge funds lost a significant amount in the sense that they had sold their shares prematurely.

How this will play out remains to be seen, but there are two factors that may provide some indication. The first is that a similar lawsuit in New York has already transpired. The New York court ruled in favor of Porsche and threw some aspects of the case out. Nevertheless, since then, CFO Härter has been found guilty of credit fraud during the takeover, and that may play in the hedge funds’ favor in German courts.

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