Hedge funds sue Porsche

A group of hedge fund firms have sued Porsche over its acquisition of VW, claiming they lost more than $1 billion over a short squeeze move by the German luxury automaker.

Elliott Management, Glenview Capital Management, Glenhill Capital Management and Perry Partners sued Porsche in federal court in Manhattan last Monday.

The suit alleges that Porsche disguised its intention to acquire more than 75% of Volkswagen stock -- the stake required by German law to effect a hostile takeover -- by piling up its shares through option contracts that did not have to be disclosed.

The firms’ suit claims that Porsche deliberately misled shareholders and the public about its takeover intentions, by having its officials and representatives repeatedly deny that Porsche intended to garner a 75% share of the company.

Once Porsche disclosed its takeover attempt in October 2008, the price of VW shares shot up to more than €1,000 ($1,400) per share, making it for a short time, the biggest company by stock market value in the world. Hedge fund firms that were shorting VW were caught in a “short squeeze” where they suddenly had to cover their short positions.

What’s more, the hedge funds claimed, Porsche proceeded to sell billions of Euros worth of shares, profiting off the firms’ short squeeze woes.

Porsche, in its interim financial statement for the period from Aug. 1 to Dec. 18, said the German public prosecutor was investigating allegations of market manipulation. The automaker said it was fully cooperating with the investigation.

Building up stakes through option contracts is a tactic that has also been used by some hedge fund firms. The Children’s Investment Fund and 3G Capital Partners mounted an activist campaign against freight railroad CSX in 2008. CSX sued them claiming their stake was illegally obtained through swaps positions, but the hedge fund firms eventually got their seats on the board.

- Hedge Fund Net