Hedge Fund Holders of Short Positions in Volkswagen Sue Porsche and Two Top Executives for Fraud for Allegedly Lying about Porsche’s Intention to Take over Volkswagen and Allegedly Manipulating the Supply of Porsche Stock
Hedge Fund Law Report
On October 26, 2008, Porsche Automobil Holding SE (Porsche), a European public company and German automobile manufacturer, announced that it owned directly, or had the right under cash-settled options to purchase, 74.1% of Volkswagen’s stock. Plaintiffs are a group of hedge funds that held short positions in Volkswagen AG (VW) stock on that date. VW’s stock price immediately rose on the Porsche announcement. By the time Porsche went public with its VW holdings, plaintiffs’ short positions equaled more than 13% of VW’s outstanding shares. Because the German State of Lower Saxony controlled more than 20% of VW, only about 6% of VW shares were available for purchase on the open market to cover the plaintiffs’ short positions. A dramatic “short squeeze” ensued as plaintiffs scrambled to cover their short positions. VW’s stock price soared from around 200 Euros per share prior to the Porsche announcement to over 1,000 Euros per share at the height of the squeeze on October 28, 2008. Plaintiffs allege that, from as early as February 2008, Porsche lied and manipulated the market in a covert effort to accumulate sufficient options to take control of VW without paying a premium for control. They claim that, had Porsche revealed its true intentions in the months prior to October 26, 2008, the price of VW stock would have begun to rise sooner and they would not have shorted VW stock at all or would have done so at higher prices. They also allege that Porsche made billions in illicit profits by releasing some of its own VW shares for sale at the peak of the squeeze. We summarize the hedge funds’ allegations and the events leading up to the dramatic October 2008 short squeeze.