A group of short sellers filed a lawsuit on Monday against Porsche for not being forthcoming with its plans to take over Volkswagen and for manipulating the shares of Volkswagen stock. A short sale, or being short, is when an investor burrows stock, sells it, and promises to repurchase shares at a later date. The hedge funds—Elliott Management, Glenview Capital Management, Glenhill Capital Management, and Perry Partners—say that Porsche began buying up Volkswagen shares through manipulative trades to hide its stock position and in an attempt to take over the company while at the same time not telling investors of its plan. Believing that Volkswagen stock was overpriced, the four funds named as the plaintiffs began borrowing Volkswagen shares and immediately selling them short. These investors say they were unaware that Porsche controlled the market for the shares and that they were borrowing stock from Porsche.

In October 2008, Porsche had acquired nearly 75 percent of the outstanding shares of Volkswagen when it disclosed its position to the market. This disclosure led Volkswagen’s stock to shoot up in price—at one point making Volkswagen the world’s most valuable company. The disclosure by Porsche caught the hedge funds off guard and set off a fiery of buying by the funds to cover their short positions. The firms are seeking to reclaim the approximate $1 billion that they had lost.

After the takeover of Volkswagen by Porsche was unsuccessful, Volkswagen ended up buying Porsche in mid-2009.

[via NY Times Blog and Bloomberg]

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