Will Hedge Funds Actually Sue Porsche?

Here's a story that goes into the "seems too ridiculous to be true" file.

It turns out that a number of hedge funds - as many as 20 total - are considering "legal action" against Porsche.

Why Porsche?

If you'll remember, Porsche sparked one of the biggest short squeezes of all time in October when it announced that it effectively controlled more than 74% of Volkswagen (42.6% of common shares and 31.5% in cash-settled options).

This news caught many hedge funds flat-footed as they realized (too late) that the float in Volkswagen was much smaller than they had thought.

This left them scrambling to cover their short positions in Volkswagen, which led to a monumental short squeeze.

This short squeeze was so unbelievably strong that it temporarily gave Volkswagen the distinction of being the most valuable publicly traded company in the world. There were no shares with which to cover some very large positions, and hedge funds were taken out back and slaughtered.

Shares of Volkswagen rose over 400% over just a few days, leading some hedge funds to sustain massive losses.

Many hedge funds were short Volkswagen as part of a pair trade - for example, long Daimler, short Volkswagen. They were decimated when Porsche announced their news, and now some funds are actually considering legal action.

You read that right - some hedge funds are actually considering legal action because of the losses that they sustained.

For all of the lawyers out there - does acquiring a position in a company (and breaking no laws as far as I know) leave you open to a lawsuit, just because a hedge fund or two happened to sustain heavy losses due to your legal purchases? Seems absolutely ridiculous to me - I can't imagine any judge doing anything but laughing if this actually reaches a courtroom.

Here is a link to the article that describes the potential legal action that may be forthcoming against Porsche..

Filed under: Hedge Fund News