Porsche Trial Takes Long and Winding Road
02 Mars 2016 - 10:58PM
Dow Jones News
By Eyk Henning
STUTTGART, Germany--In Germany Inc. versus a group of American
hedge funds, the hedge funds just got a leg up.
The German judge overseeing the latest turn in an eight-year
legal battle between Porsche SE and hedge funds including Elliott
Management Corp. and D.E. Shaw has made the unexpected decision to
step back into the case after prosecutors had already wrapped up
their arguments. The judge will bring back two witnesses and begin
questioning them Thursday morning.
The move was seen as a boost for prosecutors who are trying to
prove two former Porsche executives concealed their company's
intention to buy Volkswagen AG for months in 2008 then manipulated
the stock market to avert insolvency.
The hedge funds, which had been betting against Volkswagen's
stock, claim the alleged scheme cost them more than $5 billion.
They have turned over material including an analysis of the
financial situation that prosecutors have used to try to make their
case. A conviction could put them in a better position to win
related civil cases against Porsche, where they are hoping to
recover their losses.
The executives--former Chief Executive Wendelin Wiedeking and
ex-Chief Financial Officer Holger Härter--deny the allegations and
testified that prosecutors misinterpreted their words and actions.
Prosecutors are seeking EUR800 million ($869.5 million) in fines
from Porsche and jail time for the two executives.
Outside observers handicapping the trial had given prosecutors
low odds of proving their case. But they say prosecutors' final
arguments presented last month appeared to have tilted things back
in their favor, and the decision by Judge Frank Maurer to rehear
two witnesses underscored that perception.
The working alliance of German prosecutors and American hedge
funds--widely reviled as predatory speculators in the country--is
an unexpected turn of events. Lead prosecutor Heiko Wagenpfeil was
almost apologetic for relying on their testimony. Just because
hedge funds have a bad image in Germany, he said during closing
remarks in February, "that doesn't mean they're wrong."
The hedge funds declined to comment. A spokesman for Porsche
welcomed the court's decision to again hear two witnesses. A
spokesman for Mr. Wiedeking said the move could help quickly end
the trial and dispel suspicions.
In the middle of the last decade, Porsche spent years building a
big stake in Volkswagen stock and had secretly purchased options
allowing it to buy even more.
The hedge funds, meanwhile, had been betting that Volkswagen's
shares would fall. In just a couple of weeks in October, the global
financial crisis and the short selling had sliced 50% off the value
of Volkswagen's shares.
To that point, Porsche officials had 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, Porsche
stunned investors by disclosing the scale of its position and
saying it intended to own more than 75%.
Porsche's announcement created what investors call a short
squeeze. Funds that had shorted Volkswagen stock needed to buy
shares to cover their positions. But the revelation made clear to
them Porsche had cornered the market in Volkswagen shares. That
meant fewer shares were available for purchase than had been
shorted.
When Volkswagen's stock opened for trading the next morning,
scarcity and strong demand from hedge funds sent its share price
soaring. Volkswagen briefly became the world's most valuable
company.
Porsche over the following days sold some of its options,
reaping as much as EUR5 billion in cash that saved it from
insolvency, prosecutors allege.
Prosecutors say Porsche's disclosure of its stock and options
was aimed more at squeezing the hedge funds than actually
controlling Volkswagen. They claim the drop in Volkswagen's stock
left Porsche sitting on billions of euros in liabilities and
running low on cash. Police investigators testified that Porsche
had only EUR326 million in cash left.
Mr. Wiedeking, the former CEO, has called the allegations an
"absurd conspiracy theory" and testified Porsche's financial
situation was much stronger than prosecutors alleged.
According to a prosecution document, Porsche legal adviser
Freshfields had encouraged the company to publicly stress 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.
Public attention has focused on the trial, because Porsche is
owned by one of Germany's richest families, the descendants of VW
Beetle creator Ferdinand Porsche. The family isn't accused of
wrongdoing, and the trial won't directly affect Volkswagen. But
Porsche, which ended up relinquishing its sports-car operation to
Volkswagen, is now Volkswagen's largest shareholder.
Defense attorneys expect to make their closing arguments later
this month and a verdict could follow soon after.
Write to Eyk Henning at eyk.henning@wsj.com
(END) Dow Jones Newswires
March 02, 2016 16:43 ET (21:43 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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