Affidavit Provides New Insight Into Porsche Takeover Trial

STUTTGART, Germany—In a windowless courtroom, a decade-old takeover battle involving Volkswagen AG is coming to a head with fresh evidence delivered by hedge funds that lost billions of dollars shorting the company's shares during an aborted takeover.

The trial concerns alleged stock manipulation by executives at Porsche SE, the holding company that owned the sports-car maker when it tried to buy the much larger Volkswagen in 2008, and isn't linked to Volkswagen's emissions-cheating scandal that erupted last year.

The latest twist in the trial came last week as hedge funds delivered an affidavit that appeared to back prosectors' accusations that executives provided misleading information to investors at a critical time during the takeover.

In it, a fund manager from D.E. Shaw states he told one of Porsche's advisers that a "short-squeeze panic…was certain to unfold" because of its October disclosure. The fund manager's affidavit states the adviser replied, after consulting Porsche, that it wouldn't change course because Porsche "wants hedge funds to go away."

Public interest in the trial has been strong because Porsche is owned by one of Germany's richest families, the descendants of Beetle creator Ferdinand Porsche. Adding to the intrigue, longtime Volkswagen patriarch Ferdinand Pië ch at the time of the attempted takeover chaired the company's supervisory board.

The families aren't accused of wrongdoing and the criminal trial's outcome won't directly hit Volkswagen. But a guilty verdict could cost Porsche SE, now Volkswagen's largest shareholder. Accused executives could face jail time and Porsche could face as much as €5 billion ($5.57 billion) in damage claims from hedge funds that suffered losses in Porsche's dealings, lawyers say.

Prosecutors, who will present closing arguments Thursday, assert that Porsche executives misled investors and manipulated markets to avert insolvency as its takeover battle unwound. Volkswagen took control of the sports-car maker, but the deal left the Porsche-Pië ch clan holding a majority of Volkswagen's voting stock.

The defendants, former Porsche Chief Executive Wendelin Wiedeking and ex-Chief Financial Officer Holger Hä rter, deny the charges and testified that prosecutors have misinterpreted their words and deeds. Mr. Wiedeking called the allegations an "absurd conspiracy theory."

Judge Frank Maurer must decide if the deal was orchestrated under false pretense. An innocent verdict would be a major setback for German prosecutors, who have worked for years on the case, and for hedge funds including units of giants D.E. Shaw and Elliot Associates.

Among documents obtained by prosecutors and seen by The Wall Street Journal is an email by Porsche's legal advisers, Freshfields Bruckhaus Deringer LLP, in which the law firm urged executives to issue statements more focused on fending off hedge funds than securing their grip on Volkswagen.

Porsche had spent three years building an about 43% stake in Volkswagen. It had also secretly purchased complicated stock options that allowed it to buy an additional 31.5% chunk of Volkswagen shares.

Mr. Wiedeking testified that the options let Porsche "hedge against price risks" on future Volkswagen stock purchases. Outside analysts have said the options could let Porsche surreptitiously corner the market in Volkswagen stock and build a controlling stake unchallenged.

Until October 2008, Porsche officials repeatedly denied that they wanted to control more than 75% of Volkswagen's shares, a key threshold under German law.

Then, on Sunday, Oct. 26, they stunned investors with public disclosure of its Volkswagen shares and options, and said it intended to own more than 75%.

The revelation astounded markets not only because it marked a U-turn from their state intentions, but because hedge funds had placed major bets in the other direction. Hedge funds, believing Volkswagen's stock overvalued, had taken large short positions, wagering on a drop.

By mid-October, the global financial crisis and short selling had sliced 50% off Volkswagen's share price. The plunge upended Porsche's hedging strategy and suddenly exposed it to billions of euros in liabilities, prosecutors claim. Police investigators testified that Porsche had only €326 million in cash left.

The former executives dispute the allegation and testified that Porsche's financial situation wasn't dire.

According to a prosecution document, Porsche legal adviser Freshfields at the time had encouraged the company to stress publicly its intention to control Volkswagen, which the adviser wrote would "cover up the indirect message" to hedge funds, while still having the "desired effect." Prosecutors concluded that effect was forcing short sellers to close their positions by buying Volkswagen shares.

A spokesman for Freshfields declined to comment.

Porsche's disclosure on Oct. 26 made hedge funds realize Volkswagen's stock would rise, not fall. Few freely traded shares were available to cover their bets, a situation known as a short squeeze.

Prosecutors and hedge funds contend that Porsche made its about-face due to pressure from short sellers. Prosecutors say the disclosure of its stock and options was aimed more at countering hedge funds than securing Volkswagen.

A representative for Mr. Wiedeking declined to comment on the documents.

The next morning's market reaction saved Porsche from financial ruin, prosecutors claim. Volkswagen shares opened at €350 a share and surged above €1,000 over following days. Porsche sold some of its options, generating as much as €5 billion in cash.

Ilka Kopplin contributed to this article.

(END) Dow Jones Newswires

February 17, 2016 20:25 ET (01:25 GMT)

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