More than a dozen U.S. hedge funds have sued Porsche and two former executives alleging the company misrepresented its intentions with respect to automaker Volkswagen, leading to a “short squeeze of historic proportions.” The funds are seeking $1 billion in damages.

The complaint, filed in U.S. District Court in New York on Jan. 25, contends that Porsche, maker of the iconic 911 sports car, obfuscated its holdings in Volkswagen while misrepresenting its intent to acquire Europe’s largest carmaker. When Porsche disclosed in October 2008 that it controlled more than 70 percent of Volkswagen, shares of the latter shot up as short sellers bid up the limited amount of free float in an effort cover borrowed stock. A nearly five-fold spike in Volkswagen’s stock price brought on by short sellers rush to buy the stock briefly made the Wolfsburg-based carmaker the world’s most valuable company.

According to the complaint, Porsche officials including former CEO Wendelin Wiedeking, suggested through much of 2008 that the company would not take over Volkswagen or raise its stake above a simple majority. “These statements were false, since Porsche had decided and begun taking steps to take over VW at least as early as February 2008, and as early as mid-2008 had achieved control of nearly 75% through outright positions and options,” plaintiffs’ lawyers wrote.

Moreover, the complaint contends that the Stuttgart-based carmaker hid its position in Volkswagen by “manipulating the market in VW shares,” acquiring much of its holdings through options contracts entered into in 2007 and 2008. Those contracts, attorneys argued, allowed Porsche to “ambush the market” once it had amassed control over enough shares.

The complaint’s arguments and lexicon are reminiscent of characterizations by U.S. railroad firm CSX, which in 2008 argued that The Children’s Investment Fund, a London-based activist hedge fund, had concealed its holdings in the company--through swaps and other instruments--before launching a proxy fight. A federal district judge ruled that TCI had indeed failed to comply with the 5 percent public reporting threshold under Section 13(d) of the Williams Act.

Still, short sellers filing suit against Porsche will face an uphill battle, given the company’s domicile. “I can’t imagine any ruling that would impose a penalty of as much as the $1 billion requested by the plaintiffs,” because Porsche isn’t listed in the U.S., and German law doesn’t require disclosure of positions in cash-settled options, Frank Biller, a Stuttgart, Germany-based analyst at Landesbank Baden-Wuerttemberg, told Bloomberg News.

Moreover, the hedge fund plaintiffs do not appear likely to pick up support from counterparts in the U.K., home to roughly 80 percent of all European hedge funds. London-based funds are believed hesitant to wade in over fears their involvement may hamper efforts to temper European regulators’ plans to clamp down on such investors.

David Stewart, chief executive of Odey Asset Management, which was among those shorting Volkswagen, told Reuters that his firm had no plans to get involved. “If anyone's got any sense, they'll just watch it,” he said.

Thursday, October 18, 2007

Ernst and Young Publish Global Hedge Fund Survey
Submitted by: Kathryn Wissel, Marketing and Communications

Ernst and Young yesterday announced the publication of their Global Hedge Fund Survey 2007. To read some of the highlights, please click here. 100 of the top global hedge funds were polled for the survey.

Some interesting findings:

* Managers believe valuation transparency is the greatest regulatory challenge and the second largest area of operational risk. Therefore “greater emphasis is being placed in a consistent approach to pricing and reporting on portfolios.”

* 58% of respondents reported that Risk Management technology systems will an area in which they will be investing heavily in the next two years.

* Reporting tied with client service for the #1 service for hedge funds prime brokers should focus on improving over two years.

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Wednesday, February 22, 2006

Time Warner and Icahn Settlement
Submitted by: Chris Young, M&A Research Director

On Friday, February 17th, Time Warner and Carl Icahn settled their putative proxy fight a little over a week after Lazard issued a report commissioned by Icahn in support of his agenda. Speaking as a former investment banker, I can attest to the blood, sweat and tears that went into the report, perhaps the most in-depth analytical presentation I've ever seen an investment bank put together for public consumption. This clearly was not a frivolous exercise or some kind of trial balloon, so it's a little surprising that the fight was dropped a week and a half after the report's highly public unveiling. Icahn faced a February 19th deadline to submit nominees to the board, and it's clear that after sifting through the tea leaves he decided that a settlement would be more productive than a proxy contest. Alan Murray in today's Wall Street Journal talks about some of the lessons that shareholders should draw from the "Icahn affair."

Continue reading "Time Warner and Icahn Settlement
Submitted by: Chris Young, M&A Research Director" »

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