Wiedeking walks while the hedge funds smolder.
THOMAS KIENZLE AFP/Getty Images

Verdict is a blow to hedge funds seeking billions in damages

By Geoffrey Smith
March 18, 2016

A German court has acquitted the former CEO and CFO of sports car maker Porsche poahy of manipulating the company’s share price during its takeover battle with Volkswagen vlkay , dealing a serious blow to a seven-year battle for compensation by U.S. hedge funds.

Hedge funds such as Elliott Management Corp and D.E. Shaw are still looking for up to €5 billion ($5.6 billion) in damages in civil suits against Porsche, which is now only a holding company that owns a majority stake in the VW group. They had hoped that a criminal conviction would bolster their case.

Instead, Judge Frank Maurer of the Stuttgart Regional Court ruled that Wendelin Wiedeking and Holger Härter, who had been CEO and CFO of Porsche respectively in 2008, had no case to answer. They had argued that their stake-building was defensive, designed to stop a competitor from taking over VW.

The plaintiffs had argued that Wedeking and Härter had misled investors by repeatedly insisting that they had no plans to take over Volkswagen, despite amassing a stake of 74.1% in the company through a combination of direct stock ownership and a much bigger position in options on the underlying shares. When Porsche disclosed the size of its interest, hedge funds who had shorted VW stock had to cover their short positions to avoid the risk of massive losses, causing VW’s share price to spike by 500% in two days. Porsche then sold some of its options, at a massive profit.

“There was no secret plan to take over VW,” Bloomberg quoted Maurer as saying. “From no viewpoint of the facts could we have rationally come a conviction.”

The takeover was one of the most controversial episodes in the history of VW, at least until the explosion of the Dieselgate scandal in September (click here to read Fortune’s in-depth investigation).

At the time, Volkswagen’s chairman, Ferdinand Piēch (who was also a shareholder in Porsche), was openly advocating a combination of the two companies, and many believe he had egged Wedeking on to scare the much larger VW into accepting a merger.

However, Piëch changed tack after VW’s powerful labor unions resisted a takeover. Porsche’s financing for its bid evaporated during the 2008-2009 financial crisis, leaving it heavily indebted and causing its share price to collapse. Piëch and CEO Martin Winterkorn then led a takeover of Porsche by VW instead.

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