A Winding Road at Porsche Trial
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 €800 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 5 billion euro 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 326 million euro 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. Eyk Henning/The Wall Street Journal