Thursday, 29 April 2010

Major New York Hedge Funds Join Lawsuit v Porsche

Eighteen investment funds today joined the lawsuit against Porsche Automobil Holding SE asserting fraud and securities manipulation in relation to Porsche SE’s failed 2008 attempt to take over Volkswagen AG. With the addition of the new plaintiffs, the now 35 funds seek to recover more than $2 billion dollars in losses. The 18 funds that joined the lawsuit are part of 6 fund families: Canyon Capital, D.E. Shaw, Greenlight Capital, Ironbound Partners, Royal Capital, and Tiger Global.

The Amended Complaint, filed this morning in Manhattan federal court, explains in greater detail how Porsche SE manipulated the price of VW stock as it secretly cornered the market in VW shares. According to the Amended Complaint, Porsche SE hid that it was cornering the market in VW’s freely traded shares by repeatedly issuing misleading statements about its activities and by spreading purchases of call options around to several counterparties to avoid detection of its increasing control. The scheme induced the plaintiff funds to establish short positions on VW stock. When Porsche SE suddenly revealed the extent of its true control of VW shares on October 26, 2008, a massive short squeeze ensued. The price of VW shares skyrocketed several hundred percent, briefly topping 1,000 Euros. Investors who had shorted VW lost billions covering their positions in the squeeze. Porsche SE collected outrageous profits at the expense of plaintiffs and others by releasing some of its shares into the market at artificial prices.

Today’s filing reveals previously unknown details of Porsche SE’s plan. The new allegations include that:

  • Less than a week before Porsche SE revealed the truth—that it had amassed control of more than 74 percent of VW’s shares— it conducted phone calls with investment advisors in New York during which Porsche SE sought to reassure the New York-based investment advisors that it was nowhere near 75 percent control. Among the false statements Porsche SE made was that although it would acquire a simple majority of VW shares, "going to 75% is not on the agenda." Porsche SE told another fund that it would stop acquiring shares after achieving 50–55% control.  
  • Porsche SE admitted to at least one plaintiff that it was spreading its options trades around to multiple counterparties to avoid detection.
  • Porsche SE’s fraudulent strategy deliberately targeted short sellers. In order to secretly obtain 75 percent ownership in VW, Porsche needed short sellers to borrow stock from owners who would not or could not sell the stock themselves and then to sell it to Porsche or Porsche's call-option counterparties. Without the additional supply created by short sellers, Porsche could never have gained control of 75 percent.  
  • Porsche SE financed its call-option strategy in part through selling put options. As the price of VW declined in the third week of October 2008, Porsche SE’s liability on the puts it had sold threatened to force the company into bankruptcy. It avoided this threat by forcing the price of VW up, which it accomplished by announcing its call-option position on October 26, triggering the squeeze.

The case is pending in the Southern District of New York, where it is captioned as Elliott Associates, L.P., et al, v. Porsche Automobil Holding SE, et al, No. 10-civ-532 (HB)(THK).

The funds are represented by Bartlit Beck Herman Palenchar & Scott LLP (see and Kleinberg, Kaplan, Wolf & Cohen, P.C. (

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