Tuesday, January 26, 2010

Lawsuit Over VW Price Surge

Back in the overly-exciting autumn of 2008, several hedge funds took a beating as a result of their speculation in the shares of Volkswagen, and the spike in VW's share price I discussed here at the time.

Those who were on the business end of a beatdown included Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital, according to reports at the time. There have been rumors of effects going beyond that list, and beyond the hedge fund world.

Over the weekend of October 25-26, Porsche unexpectedly disclosed that through the use of derivatives it had accumulated a 74.1% stake in VW, up from 34%. The state of Lower Saxony owns 20.1% This meant that there was a "free float" of only 5.8% of VW's capitalization. It also meant, as a matter of arithmetical necessity, that some of the shares that were on loan for shorting must actually have been the property of Porsche or Saxony, though the short sellers presumably obtained them through the services of a prime broker.

It didn't take long for short sellers to do the math and decide that the exit door was shockingly narrow. They rushed to cover their shorts, and the price spiked, up 145% when the exchanges opened for business Monday, October 27.

Four of the large hedge funds involved (Elliott, Glenhill, Glenview, and Perry) have now filed a lawsuit in federal court in New York alleging market manipulation and seeking to recover these losses.

In a statement, Porsche said: "The lawsuits have not been delivered to us yet. We point to the fact that we have always complied with current capital market regulation."

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