Porsche Wins Dismissal of Hedge Fund ‘Short Squeeze’ Lawsuit
A New York State appeals court dismissed a lawsuit brought by hedge funds against Porsche on Thursday, handing the German automaker a big victory in the long-running legal battle over its controversial takeover of Volkswagen.
The Appellate Division decided that the hedge funds lacked jurisdiction to bring a lawsuit in a New York State court, ruling that there was an inadequate connections between New York and the facts of the case. The opinion reverses a trial court ruling last summer that had upheld the action. The decision also mirrors a federal court ruling two years ago that bounced the hedge funds claim.
“The only alleged connections between the action and New York are the phone calls between plaintiffs in New York and a representative of defendant in German, and the e-mails sent to plaintiffs in New York but generally disseminated to parties elsewhere,” said the brief opinion. “We find that these connections failed to create a substantial nexus with New York, given that the events of the underlying transaction otherwise occurred entirely in a foreign jurisdiction.”
The litigation stems from a historic “short squeeze” in the shares of Volkswagen in 2008. For years, hedge fund speculators had followed Porsche’s protracted attempt to gain control of Volkswagen.
Several dozen hedge funds had put a large bet in place that Volkswagen would decline in value because they thought Porsche had stopped buying Volkswagen stock. But in October 2008, when Porsche disclosed that it owned a 75 percent stake in Volkswagen, shares of Volkswagen spiked and the funds absorbed huge losses when they closed out their negative bet, or short positions.
The hedge funds — a group that included Elliot Associates, Viking Global Equities, and Glenview Capital Partners — accused Porsche of misleading investors about its stake in Volkswagen. They argued that Porsche should have disclosed its Volkswagen position much earlier than it did, and committed securities fraud by making deceptive public statements about the holding.
They first filed a lawsuit in federal court. A federal judge in Manhattan dismissed that case in December 2010, citing a 2010 United States Supreme Court ruling — Morrison v. National Australia Bank — that severely limited shareholders’ ability to sue a foreign company in the United States if that company’s shares traded on an overseas exchange. The hedge funds have appealed that decision to the federal appeals court.
Meanwhile, after losing in federal court, 26 of the funds brought a parallel action in state court. The funds scored a win this summer when the trial court judge, Justice Charles E. Ramos, denied Porsche’s motion to dismiss the case. But Thursday’s appellate ruling ends the funds’ attempts to sue the carmaker in New York State court.
But wait, there’s more. Some of the funds that lost in federal court also sued in Germany, and those actions are pending. For Porsche, though, the prospect of litigating the dispute in its home country is not nearly as daunting. German courts typically don’t award big damage like United States courts do, and there also aren’t juries in Germany.
Representing Porsche in the case is Robert J. Giuffra Jr. of Sullivan & Cromwell, who called the ruling “an important victory” for his client.
James B. Heaton III of Bartlit Beck Herman Plaenchar & Scott, the lawyer who argued the case for the hedge funds, declined to comment.