Hedge Funds Sue Porsche Over Alleged Short Squeeze

Jan 28 2010 | 2:20pm ET

A group of short-sellers led by Elliott Associates has sued Porsche, alleging that the luxury automaker manipulated the price of Volkswagen shares in an attempt to acquire its fellow car company.

Porsche CarerraPorsche Carerra GTThe lawsuit alleges that Porsche’s actions cost the short-sellers, which also include hedge funds Glenhill Capital, Glenview Capital Partners and Perry Partners, among others, more than $1 billion. The complaint, filed this week in Manhattan federal court, accuses Porsche of misleading investors and seeking to hide its trading in VW stock.

Porsche announced in October 2008 that it controlled a majority of VW shares, after spending most of the year denying that it sought to acquire the company. Elliott and its fellow litigants say Porsche used manipulative trades to hide its growing stake in VW, which caused the company’s shares to soar, burning many short-sellers.

“Plaintiffs were forced to cover their short positions at prices that spiraled higher and higher,” the complaint alleges. “Porsche released billions of euros worth of shares into the short squeeze for its own profit. By realizing some of its own positions, Porsche was able to skim off outrageous short squeeze profits while still maintaining the bulk of its position for the takeover.”

Porsche eventually abandoned its pursuit of VW, and is now selling its famed sports-car unit to the company.

The short-squeeze didn’t hit U.S. hedge funds exclusively, but those British hedge funds burned are holding their fire, according to Reuters, fearful of arousing further anger against the industry as the European Union considers draconian new alternative investment regulations.

“If anyone’s got any sense, they’ll just watch it,” Odey Asset Management CEO David Stewart told the news agency. Odey was among the hedge funds shorting VW in 2008.

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