* Hedge funds claimed "short squeeze" on Volkswagen shares
* Porsche won dismissal of lawsuit by a trial judge in 2010
* Appeal focuses on U.S. high court ruling on foreign
By Grant McCool
NEW YORK, Feb 24 Federal appeals judges on
Friday honed in on whether a U.S. Supreme Court ruling limiting
securities fraud lawsuits barred a $2 billion case by hedge
funds accusing German automaker Porsche SE of fraudulently
cornering the market in Volkswagen AG shares in 2008.
Germany's Porsche won dismissal of the lawsuit in December
2010, when a trial judge in New York said 32 hedge funds,
including Elliott Associates and Black Diamond Offshore Ltd,
could not pursue the $2 billion lawsuit.
That judge, Harold Baer, cited the high court's June 2010
ruling in Morrison v National Bank of Australia Bank Ltd
, which made it harder for investors to use U.S. courts
to pursue securities claims involving alleged wrongful conduct
The hedge funds said they were victimized when Porsche
quietly bought nearly all the freely traded ordinary
shares of Volkswagen as part of a plan to take over
the company, contrary to its public statements that it had no
plans to do so.
When Porsche revealed its holdings in October 2008, shares
of VW soared, briefly making the company the world's biggest by
market value. This caused a "short squeeze" and created losses
for the hedge funds, which had entered swap agreements and would
have benefited from a decline in price.
At an unusually long 80-minute hearing before a panel of the
2nd U.S. Circuit Court of Appeals in New York, Porsche's lawyer
Robert Giuffra maintained that the Morrison ruling guided this
case, prompting skepticism from the bench.
"That does not mean it means what you say it means," Circuit
Judge Pierre Leval said. "We have to figure out what it means.
To say we should follow Morrison, duh, we know that."
Leval and his colleagues on the three-judge panel, Robert
Sack and Peter Hall, frequently questioned lawyers on both sides
about the relevance of Morrison, without indicating how they
Baer had ruled that the hedge funds' swaps were essentially
transactions made on foreign exchanges and markets and not
domestic transactions warranting protection by U.S. courts.
James Heaton, a lawyer for the hedge funds, argued that the
swaps were subject to section 10(b) of the Securities Exchange
Act of 1934 because the transactions took place in U.S.
"After Morrison, it is that simple. The District Court's
decision to the contrary was in error," the hedge funds' lawyers
said in written briefs to the appeals court.
But Giuffra countered that a reversal of Baer's decision
would result in "ignoring the economic reality of what the
The case is Viking Global Equities LP et al v Porsche
Automobile Holdings SE in the 2nd U.S. Circuit Court of Appeals
in New York No. 11-397.