Porsche’s Hedge Fund Foes Seek to Tip Scales in Court

Hedge funds that made bets against Volkswagen AG’s stock price before a failed takeover bid by Porsche SE half a dozen years ago have suffered a lot of losses, first on the stock market and later in court.

Investors suing Porsche over the bid have been on the short end of rulings in German courts as well as the U.S. A Stuttgart appeals court’s decision in August to revive criminal charges against Porsche executives, however, may bolster their case, lawyers for the investors say.

Hedge funds and individual investors are seeking a total of 5 billion euros ($6.3 billion) in various suits around the country. Elliot International LP and Perry Partners LP, which are seeking 1.8 billion euros, will try to capitalize on the Stuttgart criminal court ruling when they present arguments to a Hanover tribunal today.

“The appeals court ruling may provide the plaintiffs with some new ammunition,” said Gregor Bachmann, a capital markets law professor at Berlin’s Free University. “It blows a bit of fresh wind in their sails.”

The Stuttgart Higher Regional Court on Aug. 18 ruled former Chief Executive Officer Wendelin Wiedeking and ex-Chief Financial Officer Holger Haerter must stand trial on market manipulation charges.

2008 Bid

The criminal court’s preliminary opinion is in line with the investors suing Porsche. They claim the company lied to the markets when it denied through much of 2008 it was planning a bid for Volkswagen. In October of that year, it said it had obtained a 74.1 percent stake, partly through options, and would try to take over the automaker.

As a result, VW’s stock price surged and short sellers incurred losses as they raced to close their positions. The Stuttgart court said Porsche’s boards may have approved the deal seven months before the company announced its intentions.

Soaring debt eventually led the effort to unravel, prompting a rescue by Volkswagen and reducing Porsche to a holding company for 50.7 percent of VW’s common stock. The Wolfsburg, Germany-based manufacturer completed the purchase of the Porsche unit that makes the 911 sports car in 2012.

“The ruling in the criminal case is worth its weight in gold, because it says that the Porsche’s leadership already decided in March 2008 to go for the takeover,” said Andreas Tilp, a lawyer for institutional investors in two cases in Braunschweig. It “will probably force the trial court for the first time to call witnesses over the issue.”

Prior Rulings

Prior to the August ruling, the investors had to abandon suits in U.S. courts after judges said the cases should be filed in Europe. Then, judges in two German courts hearing related complaints said that Porsche wasn’t liable for any of the losses.

Porsche rejects the claims and is convinced the allegations against its former managers will prove unfounded, company spokesman Albrecht Bamler said in an e-mailed statement. The civil suits need to be judged independently from the criminal case, he said.

The criminal judges’ ruling may not be enough to change the minds of their colleagues on the civil benches, lawyers said. A Stuttgart civil court in March has already dismissed a 1.4 billion-euro hedge fund suit, saying even if Porsche had hid its plan, the company wouldn’t be liable. That case is now on appeal.

The rules that applied in 2008 didn’t require Porsche to disclose the options it had acquired and the company could have changed its mind about a takeover at any time, the Stuttgart civil court judges said in March.

Grave Circumstances

Courts may not reintroduce “disclosure requirements through the back door” by holding a company liable for not communicating holdings that weren’t covered by the transparency laws at the time, said Bachmann, the professor at Berlin’s Free University. The hedge funds can only win if they convince the courts that there were “additional grave circumstances, turning this into reprehensible action,” he said.

Elliot and Perry Partners would argue that the test was met. While their German lawyer declined to comment before today’s hearing, he told the Hanover court in a July filing that Porsche is trying to “trivialize the biggest market manipulation in the history of business.”

Judges rejecting three investor suits in Braunschweig and one in Stuttgart have relied on precedent when saying Porsche’s communication to the markets didn’t amount to “reprehensible” action.

“The bar is very high when we talk about these kinds of statements,” said Ruediger Veil, a corporate law professor at Bucerius Law School in Hamburg.

Good Standing?

The investors need to find a panel of judges that is willing to develop the case law to cover the facts of the suit, said Veil. The criminal ruling against Wiedeking and Haerter may help move the judges in that direction, he said.

“But how likely that is, is hard to say,” said Veil. “Politically, hedge funds aren’t in good standing, and that plays a role on how willing judges are to make such a move.”

His colleague from Berlin, Bachmann, said that it depends on the judges’ “gut feeling.” The scale may tip either way, he said.

“This certainly is a tricky case,” said Veil. “But totally fascinating material. I will use it in my classes.”

Today’s case is LG Hannover, 18 O 159/13.

Before it's here, it's on the Bloomberg Terminal.