Turbulent Days

Porsche

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Former Porsche Chief Executive Officer Wendelin Wiedeking and ex-Chief Financial Officer Holger Haerter were acquitted of charges they manipulated shares of Volkswagen AG in 2008 in a failed bid to buy the carmaker. The acquittal is a blow to prosecutors, who brought the two former managers to trial in October for misleading investors about their plans to acquire VW more than seven years ago. Authorities had asked for prison terms of 30 months for Wiedeking and 27 months for Haerter plus fines of 1 million euros ($1.1 million) for each. They also sought a fine of 807 million euros for Porsche. Wendelin Wiedeking, 63, the former chief executive of Porsche, and Holger Härter, 59, the former chief financial officer, were acquitted by a German court of charges stemming from a news release the company issued in October 2008.

Prosecutors argued that the news release was intended to mislead investors and to drive up the price of Volkswagen shares. Porsche had amassed a huge stake in Volkswagen as part of an audacious takeover bid. Prosecutors also argued that the maneuver averted losses that could have devastated the wealth of the Porsche and Piëch families, who owned the sports car maker. Instead, Porsche SE, the families’ holding company, went on to acquire more than half the voting shares in Volkswagen, and it remains the dominant shareholder. No members of the Porsche and Piëch families were charged with crimes in the case. But had there been a guilty verdict, Porsche SE might have been compelled to repay 800 million euros, or $901 million, in what prosecutors said were ill-gotten market profits. A guilty verdict would also have helped hedge funds that are suing Porsche SE to try to recover some of the billions they say they lost betting that Volkswagen shares would fall.

A panel of five judges accepted arguments by defense lawyers that the prosecution had failed to prove that Mr. Wiedeking and Mr. Härter deliberately tried to mislead investors. The defense also argued that Porsche SE was not, as prosecutors contended, on the brink of financial ruin. The prosecutors said after the verdict on Friday that they would consider whether to appeal. Mr. Wiedeking was once Germany’s highest-paid chief executive, credited with restoring Porsche to profitability by introducing sport utility vehicles to augment the two-seat sports cars that made the company famous. He and Mr. Härter left Porsche in 2009. Mr. Härter was previously convicted of credit fraud in connection with the same events. Mr. Härter paid a €630,000 fine after his appeals of that conviction were rejected. Porsche SE’s oversight of Volkswagen has come under scrutiny since Volkswagen admitted in September that it had rigged 11 million diesel vehicles to cheat on pollution tests. Investors and analysts say the Porsche and Piëch families descendants of Ferdinand Porsche, who invented the original Beetle “people’s car” — have helped perpetuate a corporate culture at Volkswagen that allowed the cheating to occur.

Ferdinand Piëch, a grandson of Mr. Porsche, was the chairman of the Volkswagen supervisory board during most of the period when the company was illegally circumventing air-quality rules. A lawyer for Mr. Piëch did not respond to a request for comment this week. Almost 90 percent of Volkswagen shares are held by just three investors: the Porsche and Piëch families via Porsche SE, with just over 50 percent; the Qatar government with 17 percent; and the German state of Lower Saxony with 20 percent.

Analysts and outside shareholders have complained that a shortage of critical voices on the board could have created an atmosphere conducive to decisions at the company that allowed the diesel cheating to occur. The trial of Mr. Wiedeking and Mr. Härter revolved around a few turbulent days in October 2008, soon after the collapse of the investment bank Lehman Brothers propelled global financial markets into chaos. Volkswagen shares were plunging, and speculators began betting that the carmaker’s price would fall further. They used a risky strategy — short-selling — in which they sold borrowed shares in anticipation of buying them back, at a lower price, and pocketing the difference. On Oct. 26, 2008, a Sunday, the Porsche holding company — which at the time owned Porsche — issued a statement that German prosecutors argued was an attempt to mislead investors and prop up sagging Volkswagen shares. In the statement, Porsche disclosed that it owned 42.6 percent of Volkswagen voting shares outright and options equal to an additional 31.5 percent. In other words, Porsche had already locked up 74.1 percent of Volkswagen shares and was close to its goal of acquiring the 75 percent needed to control the company under German law. It was no secret by then that Porsche was trying to take over Volkswagen and had acquired a sizable bloc of shares, and options. Porsche was eager to protect its relationship with Volkswagen, which helped manufacture highly profitable Porsche cars like the Cayenne sport utility vehicle. But the size of the options position shocked the investors betting that the stock would fall. They concluded that if Volkswagen had locked up so many shares, relatively few were still up for grabs. The hedge funds suddenly needed to settle their short-sale bets, which required them to own Volkswagen shares. The Porsche statement left them with the impression that there were not enough available to buy, a situation known as a short squeeze.

On Tuesday, Oct. 28, 2008, two days after the Porsche statement, Volkswagen’s share price — which only weeks earlier had been less than €200 — topped €1,000 as panicked short-sellers scrambled to buy at any price. For a few hours, Volkswagen passed Exxon Mobil as the world’s most valuable company. Prosecutors said the market panic was unwarranted. Porsche, they argued, was on the verge of running out of cash it needed to sustain the options play, according to prosecutors, and soon would have been forced to dump millions of shares on the market. Porsche, prosecutors said at the trial, had already lost €7 billion as a result of the complex combinations of derivatives it used to control Volkswagen shares, and was poised to lose another €7 billion in the coming week. But lawyers for Mr. Wiedeking and Mr. Härter denied that the two had issued misleading information. The defense lawyers cited expert testimony that called into question whether the Oct. 26 news release caused Volkswagen shares to soar. They also denied that Porsche was in financial difficulty, saying it had €3 billion in cash in hand plus Volkswagen shares still valued at €25 billion. Walther Graf, one of Mr. Wiedeking’s lawyers, said that the news release on Oct. 26 was correct, and that Porsche was always honest about its intentions. “The openly communicated goal was to counteract further market turmoil by creating transparency,” Mr. Graf said in a statement to the news media that summarized his final argument, delivered on Monday. German news media had given the prosecution little chance of success, because of the financial complexity of the case and because many crucial witnesses who had worked for Porsche said they could not remember events. In addition, two relatively young prosecutors, Heiko Wagenpfeil and Aniello Ambrosio, faced some of Germany’s most prominent defense lawyers. After the events of 2008, Porsche became a subsidiary of Volkswagen. The Porsche and Piëch families effectively traded their stake in the sports car company, and a dealer network the families owned, for control of Volkswagen.