Global Dispute of the Year, U.S. Litigation: The Porsche Short Squeeze Defense
Honorees: Sullivan & Cromwell, Porsche Automobil Holding SE
When bankers and sports car manufacturers collide, it’s going to be expensive—and so it proved when 40 hedge funds took on Porsche Automobil Holding SE, which, they claimed, had squeezed the price of its stock and left them billions short.
It happened like this. In early 2008, Porsche began buying options in sister company Volkswagen— and in huge quantities. By buying options instead of shares, the Porsche interest wasn’t disclosed. It was acquisition by stealth.
U.S.–based hedge funds (unaware of Porsche’s acquisition by stealth) saw the VW stocks as overvalued and began selling them short, until, in October of that year, Porsche Automobil Holding SE let the world know that it had bought up 75 percent of VW’s shares.
Buying was frenetic when the disclosure was made. The price of shares briefly topped €1,000. The shorting hedge funds were furious. No way, they said, would they have shorted the VW shares if they knew Porsche had bought up those positions.
In 2010, the hedge funds set out to sue Porsche in the Southern District of New York, claiming losses in excess of $7 billion.
In a novel application of the U.S. Supreme Court’s anti-imperialist holding in Morrison v. National Australia Bank, federal district court Judge Harold Baer concluded that the relevant section of the Exchange Act of 1934 does not apply to security-based swap agreements referencing shares traded on foreign exchanges. Unsatisfied, many of the plaintiffs brought common-law fraud and unjust enrichment claims in two separate cases in New York state court, in essence reiterating the factual allegations they had made previously.
Porsche moved to dismiss their claims with a motion of forum non conveniens, arguing that Germany was the right place to bring the case, but the judge denied the motion in April 2012.
Fortunes changed when, in December, the trial court’s decision was reversed by the appellate division, which unanimously held that “Porsche met its heavy burden to establish that New York was an inconvenient forum” and “the events of the underlying transaction otherwise occurred entirely in a foreign jurisdiction.”
Any further litigation will take place in Germany, where the risks to Porsche appear far less than they were in New York. The biggest reason is systemic: German judges will fix damages if any rather than an American jury.
Already, the Porsche case seems to have had an impact on litigation patterns: 2012 saw the number of securities class actions brought in U.S. courts against non–U.S. issuers decrease—arguably, because of the judges’ interpretation of security law in the cases that have come to be known as “The Porsche Short Squeeze Defense.”