By on November 29, 2008

In a report to appear Monday, the German magazine Der Spiegel will write that “several law firms are compiling material for lawsuits to hold Porsche liable. They are working for hedge funds which had lost billions of Euros.” That’s news to Porsche CFO Holger Härter. He says he hasn’t heard of anybody who wants revenge or restitution. “I don’t even know who might have been hurt.” On Sunday, FAZ will publish an interview with Härter. First question: “When will the hedge fund called Porsche close its sheet metal factory?” Härter’s answer: “Our core business is and remains the automobile.” Everybody knows: not true. Porsche made more profits than sales in the last fiscal year. Of €8.6b in profits, only €1b were generated in that sheet metal factory. €7.6b were generated with derivatives. That was in the last fiscal year, which ended July 31. God, Härter and Wiedeking only know how much the Porsche hedge fund generated in the months thereafter, when the VW stock went wilder than girls at Mardi Gras. Härter now says they didn’t really mean it. Here is Härter’s version:

When Porsche started to think about taking an interest in Volkswagen, Härter says, they did the same any prudent businessman would do: hedge a little. Take out some insurance against, god forbid, a rising VW stock. At that time, the VW stock traded at around €30– pretty much the same level as it did for many, many years before. Shortly after Porsche innocently took out insurance, the VW stock started to inexplicably climb. It doubled in 2006. Doubled again in 2007. It shot up to over €1000 in October.

Praise the Lord for insurance! Härter claims he doesn’t like these high stock prices at all. “If the stock would have stayed at the old levels, we would have had to pay much less taxes than now.” Yes, profits can be such a bear when the taxman cometh. Everybody will have sympathy.

While lawyers are sorting their paperwork, Härter is already preparing his defense. Härter to the FAZ: “These accusations are totally without merit. We deny any responsibility. We observed the law. We duped nobody.”  We’ll see how that plays in court.

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24 Comments on “Payback is A Bitch: Hedgies To Sue Porsche For Billions...”


  • avatar
    Hippo

    The anglo way, steal from everyone and when losing sue.

  • avatar
    Vega

    He’s partly right, though. Until Porsche exercises these options (which they have not yet done in large volume), gains are on paper only, but still have to be taxed…

    Exercising a large amount of these options on the other hand would weaken the squeeze of the market, sending VW stock south again. And also wipe out a sizeable part of these paper gains.

  • avatar
    chuckR

    Somebody phone a waahmbulance for the hedge funds. They got squeezed – tough.

    Do you know the difference between a bucket shop and a hedge fund? Me neither. Except there was no pretense with the bucket shops.

  • avatar
    chuckR

    Oh, and hedge funds are fuglier than a Panamera.

  • avatar
    Kendahl

    In my opinion, Porsche is still fundamentally a car company. To survive the coming restrictions on fuel consumption, they need Volkswagen to pump up mpg numbers. On their own, Porsche could not afford to buy VW. However, they can with the cash they liberated from the hedge funds (who are pissed about being beaten at their own game).

  • avatar
    ttilley

    Gee, I thought the reason “hedge funds” (an oxymoron, since the last thing they do is “hedge” risk) were unregulated is because they were only open to “sophisticated investors”.

    If these sophisticates need the protection of the courts against the Big Bad Market, then perhaps they should have been regulated after all.

    At least, that’s the message I’m hearing from this particular case.

  • avatar
    Robstar

    Not sure why you guys think hedge funds are unregulated. They are regulated, just differently from other businesses in the financial sector.

  • avatar
    Paul Niedermeyer

    Bertel, Why all the bad vibes against Porsche? They acted prudently, and caught the hedge funds, who were shorting VW stock, with their pants down. The reason the stock zoomed was because the hedgies had to cover their losses. Boo hoo. Call the ambulance (lawyers).

    Porsche: 1
    Hedge funds: -1

  • avatar
    ttilley

    Not sure why you guys think hedge funds are unregulated. They are regulated, just differently from other businesses in the financial sector.

    If by “differently” you mean “to a markedly lesser standard”, then sure, but that’d be my point.

    Otherwise, regulation, or lack thereof, of hedge funds has been an on-going issue ever since Long-Term [sic] Capital [sic] Management [sic] had to be bailed out, I mean, needed Alan Greenspan to act as it’s personal loan broker, back in the late 1990s.

    Just Googling “hedge fund” and “regulation” should illustrate the point.

    Tom.

  • avatar
    TireGuy

    Nobody forced the Hedge Funds to go into Short Selling on VW. Everyone knew that Porsche intended to acquire further stocks, and everyone knows that in short selling you can run into a short squeeze if not enough shares are available. Big risk, with big rewards. And potentially big losses. And now they want to sue Porsche? Funny world …

  • avatar

    @Hippo:

    Cut that crap out.
    Racism has no place here.

  • avatar

    Besides, the Angles were from what’s basically ~Denmark.

    Hell, I’m not even sure most modern-day Germans would consider themselves either Angle or even Saxon.

  • avatar

    @Paul: I have no idea. Crybabies. Someone’s probably angling for a settlement. There are already nasty noises about “insider trading” and “manipulations.”

    @Vega: I think Härter refers to the realized pre-tax profits. Even in Germany, paper profits are not taxable until realized. Härter doesn’t disclose any particulars about his options. If he rolls them over, and a profit arises, there is tax to pay. ‘sides, there are ways to gain from falling stock prices, the most amateurish being a put.

    @Willman: Ironically, the people in Wolfsburg, VW’s home town, consider themselves “Lower Saxons.” Would be impossible in the U.S. of A. The state of “Lower Saxony” would have long been renamed to “Special Needs Saxony.” And then Hessen would have sued because their Opel is the one who’s handicapped ….

  • avatar
    blowfish

    Wonder what kind of Negligence can they prove as Porsche has caused the detriment to them?

    When u short sell anything u’re exposed tot he risk and u can make a killing at the same time should the stock has no life again.

    Same now as GM and whole bunch of stock are placed under no short lists.

    The Hedgies knew very little about Porsche as the real McCoys who has very very deep pockets.

    How to prove any conspiracies when all they want to is own the co outright. These idiots were caught in the cross fire thats all.

  • avatar
    John Horner

    If I were King of the Markets I would outlaw short-selling, stock option trading and all other manner of side-bets (credit defaults swaps, etc.). They add volatility and turn the capital markets into nothing other than big casinos.

  • avatar
    compy386

    I’m pretty sure what Porsche did would be illegal in the US. There are laws preventing someone from taking over a company quietly at low prices. You have to disclose any significant purchases you make in it. That should include derivatives. If this wasn’t illegal, anyone could quietly take over a company without paying a premium. That’s at a disinterest to current shareholders which the laws are designed to protect.

  • avatar
    Martin Schwoerer

    It wasn’t only the hedge funds that were hurt by Porsche’s shenanigans. Lots of small traders lost their shirts too, but they are not going to sue Porsche, naturally. By the way, one of the “small” traders used to be one of the richest guys in Germany — he owned the pharmaceutical company Ratiopharm — and is being forced to sell out at the present time.

    So it’s simply inaccurate to say this is a German industry vs Anglo-Saxon speculator thing. I think what Porsche did would have been totally against the law of any well-developed finance regime. In effect, Porsche used, or mis-used, the now totally discredited lax German rules.

    By the way, does anybody think Porsche is some kind of a model for capitalism? A company owned by a manipulative, secretive clan that takes over a bigger company in clandestine steps? Maybe Porsche thinks they don’t need efficient, well-regulated capital markets but the rest of the world does. Companies like Porsche that make rich people’s toys like to forget that if the rest of the world followed their example, there wouldn’t be any internet companies, for that matter neither the internet itself, nor any mobile phones around.

  • avatar
    TireGuy

    I do not know where anyone has the knowledge from that German laws on notifying about sharholdings are lax. In Germany, you have to notify the public in any case when you exceed any of the following threshholds:

    3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and
    75%

    Theses thresholds are quite usual in many countries. No need to notify any share acquisition, only if there could result a change in the position of a shareholder.

    Porsche had long ago notified that they owned more than 30%. Any shortseller knew that Porsche could add further 20% without further need of notification. Further anyone knew that Lower Saxony owned further 20% and would not let go. Finally, since the takover of Contiental any serious trader knows that companies can also try to get options on shares through so called “Cash settled option”, where usually the banks secure against their risk by buying the stock themselves. This happened here for about 30% of VW stock.

    Consequence: the Hedgies just were stupid and greedy. Does this not ring a bell?

  • avatar
    Landcrusher

    This is exactly the problem with many of the derivatives. People take out virtual insurance policies against bad outcomes, and then proceed to cause those outcomes in order to collect.

    Companies that write was essentially an insurance policy should be regulated as such. Those that were not insurance companies should be prosecuted, if possible, for fraud, and the ones that were insurance companies busted for negligence. We similarly go after the bettors for gambling, insurance fraud, etc.

    Why not turn the lack of regulation into a reason to prosecute rather than an excuse not to.

  • avatar
    Martin Schwoerer

    Tireguy,

    according to my information, on October 26th Porsche for the first revealed that it owned nearly 43% of VW’s shares outright and had derivative contracts on nearly 32% more. I think a requirement to report only “after the fact” is lax; I refer to compy386 above who explains why this is problematic.

    But what I think really sounds unusual and wrong is that derivatives did not need to be revealed. (Correct me if I am wrong, I am not an expert on German securities law and may need better information sources).

    Adolf Merckle — the pharmaceutical billionaire who lost his fortune through this Porsche fiasco — is probably a fool, but he is no idiot. If what I hear is correct, it was unprecedented for a company of repute to use derivatives to manipulate the market.

  • avatar
    AG

    Its like a man who burns his house down because the insurance settlement is worth more than the house. That’s the way hedge funds operate. They got beat at their own game when it became apparent that Porsche owned so much of VW that there wasn’t enough outstanding stock left on the open market to cover their shorts.

    And do you really think any court in Germany is going to side with some New York or London based hedge fund over a major German company?

  • avatar
    TireGuy

    Martin Schwoerer :
    December 1st, 2008 at 2:32 am

    Tireguy,

    according to my information, on October 26th Porsche for the first revealed that it owned nearly 43% of VW’s shares outright and had derivative contracts on nearly 32% more. I think a requirement to report only “after the fact” is lax; I refer to compy386 above who explains why this is problematic.

    But what I think really sounds unusual and wrong is that derivatives did not need to be revealed. (Correct me if I am wrong, I am not an expert on German securities law and may need better information sources).


    If what I hear is correct, it was unprecedented for a company of repute to use derivatives to manipulate the market.

    Having to report only after you have exceeded certain thresholds is quite usual. In the end, you should be able to purchase a stock at its current market price, and not at a phantasy price coming up only because other people think you want to buy more. In any case, investors are protected through the different reporting levels. Also, exceeding the levels is a fact. If you would have to notify already pure intentions, then this could be open for abuse.

    Call Options must be notified at exactly the same thresholds (except for the 3% threshold). However, Porsche did not use directly call options, but “cash settled options”, which give Porsche the right to require a Bank to give Porsche the difference between the original option price and the market price. As a consequence, a Bank selling such option will buy the stock itself to protect it. In practive, but not legally, such options are settled in the end by delivering the stock. This way was used to attack Continental AG this year, and it might be considered a loophole. In any case, the Hedgies know the Continental case, and therefore were aware that this was legal under German law and they were running a risk. Bad luck for them.

    Finally: Porsche did not try to manipulate the market. They used available acquisition ways, known to everyone. There goal is and was to acquire Volkswagen, not to manipulate the share price – they do not want to sell the shares again. Accordingly, “manipulation” is the way of the Hedgies, especially shortsellers, but not of a strategic investor.

  • avatar
    Martin Schwoerer

    Tireguy: thank you for your informative posts! In particular, thanks for sharing the background information about the cash settled options, etc.

  • avatar
    blowfish

    Porsche had long ago notified that they owned more than 30%. Any shortseller knew that Porsche could add further 20% without further need of notification. Further anyone knew that Lower Saxony owned further 20% and would not let go. Finally, since the takover of Contiental any serious trader knows that companies can also try to get options on shares through so called “Cash settled option”, where usually the banks secure against their risk by buying the stock themselves. This happened here for about 30% of VW stock.

    Consequence: the Hedgies just were stupid and greedy. Does this not ring a bell?

    If u’re going to short anything u need to know first if thats a strong co.
    Porsche or any of these German co. got loads of cash, unlike the penny stocks of Vancouver exchange in its heyday. Just about anybody can have a co. U can make your dog secretary & CEO, a couple of beat up Buicks a wood desk listed as assets.

    Sollt these folks mistaken the Iceberg as a beautiful beach that u can go full tilt to land on the beach thats all.


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