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)
Copyright (c) 2016 Dow Jones & Company, Inc.
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