Parkcentral Global Hub Limited v. Porsche Auto. Holdings SE

763 F.3d 198 (2014)

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Parkcentral Global Hub Limited v. Porsche Auto. Holdings SE

United States Court of Appeals for the Second Circuit
763 F.3d 198 (2014)

  • Written by Brett Stavin, JD

Facts

Numerous international hedge funds (the hedge funds) (plaintiffs) held security-based swaps tied to the price of the stock of Volkswagen AG (VW), a German corporation whose stock traded on foreign exchanges. The swap agreements, some of which were executed in the United States, amounted to synthetic short positions, such that the swaps would increase in value if the price of VW stock decreased, and vice versa. The hedge funds alleged that certain actions by Porsche Automobil Holdings SE (Porsche) (defendant), also a German corporation, constituted fraudulent statements actionable under § 10(b) of the Securities and Exchange Act. From 2005 through 2007, Porsche purchased shares of VW but disavowed any intent to obtain a controlling interest in the company. Allegedly, however, in February 2008, Porsche developed a plan to acquire a controlling interest. Because there were insufficient shares available on the open market, Porsche had to induce existing shareholders to loan their shares to short sellers. Porsche encouraged the shorts by repeatedly denying any intent to take over VW, which in turn made VW appear overvalued. Once the short sellers opened their positions, Porsche purchased call options, which gave Porsche the right to buy VW shares at a specific date and price. The counterparties to the call options held VW shares to hedge their risk. To finance the purchase of the call options, Porsche sold put options, which would require Porsche to pay the put counterparty the difference between the VW stock price and a preset strike price. At first, VW share prices gradually increased, but in October 2008 VW prices fell dramatically, increasing Porsche’s liability for its put options. To avoid the impending financial disaster, Porsche publicly announced their intent to take a controlling interest in VW, causing VW share prices to increase sharply. The hedge funds incurred massive losses caused by the short squeeze. Subsequently, the hedge funds sued Porsche in federal district court, alleging violations of Securities and Exchange Commission (SEC) § 10(b). Porsche moved to dismiss, arguing that the swaps’ reference to foreign securities made them foreign transactions under the United States Supreme Court’s holding in Morrison v. National Australia Bank and, therefore, § 10(b) could not apply. The district court agreed and dismissed the case. The hedge funds appealed.

Rule of Law

Issue

Holding and Reasoning (Per curiam)

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