Did Porsche mislead the markets when it bought Volkswagen?

Ahead of a court hearing in Celle, Germany, next week, private investigators have uncovered damning new evidence about Porsche’s attempts to cover up Volkswagen’s 2008 acquisition efforts. Despite Porsche’s repeated denials to the At the time, the revelations featured in the latest twist of the 14-Year-Old Saga suggest that Porsche had in fact plotted the takeover as early as 2005, more than three years before telling the market of its true plans.

Markets were stunned in October 2008, just as the global financial crisis was sending shockwaves through the global economy, when Porsche released a regulatory filing indicating it had amassed a 74.1% stake in Volkswagen , via a combination of direct stock purchases and an even larger stake. holding stock options settled in cash. With the state of Lower Saxony owning 20% ​​of Volkswagen and index funds owning another 5%, the gigantic acquisition of Porsche meant that there was only 1% free float in the market. At the same time, more than 12% of Volkswagen shares had been sold short by hedge funds and other traders bearish on the company’s outlook, and as a result the imbalance saw the ‘mother of all short cuts’ occur, Volkswagen stock briefly rising to value the company as the world’s most valuable company, stealing the crown from Exxon, dragging short sellers into some of the heaviest losses in history.

Those short of Volkswagen shares suffered massive losses in the melee that followed Porsche’s disclosure, with estimates of up to $40 billion wiped from the balance sheets of those caught on the wrong side of the trade. Lawsuits duly followed, with Porsche management accused of market manipulation and profiting from the surging Volkswagen stock price, with the plaintiffs saying there would never have been a stock shortage if Porsche informed the market that he was building a huge stake via stocks and options. purchases and planned to launch a full takeover of the business.

While German law did not require Porsche to disclose its option positions, Porsche was accused of breaking the law of the market by actively misrepresenting its intentions and thereby actively misleading investors. The claims were firmly rejected by Volkswagen and the courts eventually ruled in favor of the defendants from Porsche, and financial regulators also cleared them of any wrongdoing.

Evidence collected by corporate intelligence firm Black Cube contrasts sharply with claims made at the time of the short squeeze and in later trials. Much was made during hearings of Porsche’s contemporary repeated denials that they intended to launch a takeover of Volkswagen, statements that had encouraged short sellers to bet against Volkswagen’s stock price. Porsche has vehemently denied misleading the market, saying they only decided on the takeover action shortly before the October 2008 announcement. The new evidence discovered by Black Cube appears to undermine the denials. , with legally obtained recordings of some of the key figures in the takeover scheme revealing a plot that took years to prepare.

Christian Dau, who worked in Porsche’s public relations team as an assistant to the public relations manager, admitted to Black Cube agents that “we have started the takeover of [Volkswagen]…in 2005…I think it was June 2005, [Wendelin] Wiedeking [Porsche’s former CEO] called me and said ‘You must hear, we have a project, we want to start buying shares of [Volkswagen]and the target is above 20%’… We bought options on shares of [Volkswagen] at a very attractive price…at that time the price of options went up, and we were able to buy options and stocks little by little, that way.

His claim was corroborated by Gregor Alpers, vice president of mergers and acquisitions at Merrill Lynch, who was Porsche’s adviser at the time and first pitched the idea of ​​a plan to buy Volkswagen in June. 2005. Alpers told Black Cube investigators that “the goal was…set from day one,” and that he and his colleagues set to work structuring a financial package that would see Merrill Lynch back Porsche in its quest Porsche saw the takeover as a way to access Volkswagen’s large cash reserves, which it planned to use to pay off its own debt.

Merrill Lynch syndicated a $35 billion loan for Porsche, leading a consortium that included Barclays and Commerzbank, and devised a strategy for Porsche to amass a huge stake in under-the-radar Volkswagen. Instead of directly acquiring Volkswagen shares, which would require mandatory reporting, Merrill Lynch suggested instead buying cash-settled options on Volkswagen shares, in an attempt to circumvent the need for public disclosure, while by achieving Porsche’s true goal of gaining control of its target society.

Merrill Lynch could not execute the options strategy on Porsche’s behalf because by virtue of advising Porsche on its takeover plans, it would be a conflict of interest to then trade based on inside information it had. . Instead, a little-known Canadian bank, Maple Financial, was recruited to execute the transaction. Operating beyond the reach of German and US regulators, Maple was able to carry out its mission and was so successful that it saw Porsche earn more in trading profits in a financial year than it did. made sales of its vehicles that year.

Old Porsche adAlpers told Black Cube investigators: “The problem is the whole derivative structure and buying the business through options, the problem was that if Merrill Lynch were to do the option strategy, and at the same time knowing that it’s in order to take over the whole company potentially, we were making ourselves an insider.And all of Merrill Lynch’s trading would be insider trading…That’s why the Maple Bank was needed… no one really knew [Maple Bank] at the time in Germany it was a canadian bank, a branch of a canadian bank… it was not under BaFin control [German financial regulator] and it was not under the supervision of the Financial Conduct Authority in London. If something of this magnitude appears on the books, obviously the regulator considers it a fraud in ways that they may be thinking “What is this?” and [query them] make such a big deal.

James Leach, Maple’s COO at the time, told Black Cube that Wendelin Wiedeking approached the bank, telling a Maple executive over dinner, “I’d like to buy [Volkswagen]. Can you help me?” Leach told investigators, “We were paid dearly for this, as you can imagine. And the idea was so [the Volkswagen takeover] succeeded, we were going to become Porsche Bank.

By the time Porsche made its surprising regulatory announcement in 2008, Merrill Lynch had been taken over by Bank of America, with the newly merged entity now reluctant to continue financing Porsche’s project. With the contagion of the worsening global financial crisis spreading through the markets, Porsche learned that the takeover attempt was too risky financially, and Porsche was considered by many observers to be on the verge of bankruptcy itself.

Walter Kraushaar, former managing director of Maple Bank, told Black Cube agents that Ferdinand Piëch, chairman of Volkswagen’s supervisory board, was behind the bank’s abrupt termination of Porsche’s credit facility, after having heard rumors about Porsche’s plans: [loan] came, then Piech convinced some of his old buddies… who are [on the] big banks advisory board, to convince the big banks not to refinance the loans…he dried them from behind.

With no line of credit available to carry out their takeover plans, Porsche executives knew the offer was unrealistic, but announced to the market anyway that they planned to buy all remaining shares and assume some. full control. Following Porsche’s surprise announcement of its 74.1% stake in Volkswagen, the share price quadrupled in value and – in a move touted as helping to unravel the short-term imbroglio – Porsche duly sold a 5% stake in Volkswagen in the market, earning huge profits and helping to alleviate their own bankruptcy problems.

Black Cube’s findings appear to bolster claims made by Porsche critics, including Elliott Associates which previously filed claims alongside other investment firms seeking $1.8 billion in damages from Porsche for losses suffered. at the moment of the short compression. The revelations could see Porsche executives held accountable for their actions in the run-up to the failed takeover, in civil and criminal proceedings. Monday’s legal case in Celle is billed as an “investor test case”, with Porsche and Volkswagen named as defendants. The case is brought under the KapMuG Act of 2005, a reform introduced by German lawmakers to provide a means of class action for investors who claim losses due to misinformation in the capital markets.

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