Appellate Court Dismisses Suit against Porsche

The Appellate Division of the New York Supreme Court dismissed a lawsuit brought by a 26 hedge funds against Porsche. The suit alleged fraud by Porsche in its takeover of Volkswagen. The hedge funds, including Elliot Associates, Viking Global Equities, and Glenview Capital Partners among others, alleged that Porsche had committed securities fraud by misleading investors through deceptive statements about the percentages of Volkswagen held by Porsche in 2008.

The hedge funds had taken short positions in Volkswagen on the belief that its stock would decline in value because Porsche had stopped acquiring its shares. When Porsche disclosed its 75% ownership, the price of Volkswagen soared, and the hedge funds took large losses in covering their short positions. Colloquially, this is known as a "short squeeze."

The hedge funds brought the action in New York State Supreme Court, New York's trial level court. Initially, the trial court rejected Porsche's motion to dismiss the action. However, the appellate court reversed that ruling, handing a major victory to Porsche. The court dismissed the suit on jurisdictional grounds. It ruled that there were insufficient contacts with New York for the plaintiff hedge funds to invoke the jurisdiction of the New York courts. The court determined that the only connections with New York were telephone calls between the plaintiffs in New York and the defendant in Germany and emails disseminated widely including to the plaintiffs in New York. Significantly, Volkswagen shares are traded on exchanges throughout the world but not on the NYSE.

Previously, the plaintiffs had brought suit in federal court in Manhattan. That case too was dismissed on jurisdictional grounds. The plaintiffs have appealed the decision to the U.S. Court of Appeals for the Second Circuit.

Unless the plaintiffs succeed in an appeal, their only recourse is to proceed in Germany.