Porsche short squeeze
Executive Summary
In 2008, the largest “short squeeze” in the history, done by Porsche’s CFO to acquire control over Volkswagen through option contracts, had caused a huge loss for multiple hedge funds and investment banks in Germany. And meanwhile in 2007, until the beginning of 2008, TCI and 3G, 2 UK-based hedge funds, violated SEC disclosure requirements, hiding their objective to takeover CSX Corporation by entering into equity total return swaps with numerous investment banks. CSX was a one of the largest railroad and transport companies in Eastern US with returns exceed S&P during 5 years before the economic downturns, which made it attractive as a take-over prey.
This report provides an analysis on how derivatives could be used to gain corporate control, resulted in financial market imbalances, using Porsche and 3G & TCI cases. The report also assesses the regulatory system associated with OTC derivatives, valuable lessons regarding their uses to achieve a company selfish goals, risks and benefits of derivatives, involvement of hedge funds and investment banks in derivatives transactions, and evaluation on whether there should be stricter disclosure requirement on derivatives instruments and regulation banning the use of these instruments by CEOs.
Part I. Porsche vs. Volkswagen Case
Porsche, a luxury automobiles manufacturer, announced in 2005 that the company had intention to purchase 20% Volkswagen shares to support German politician’s plan of reducing foreign ownership and improve domestic investment as Volkswagen’s shares were majorly held by Lower Saxony (just over 20%) and the rest were freely traded in the market.
2 years later, Porsche increased its holdings in Volkswagen to 30% and by March 2008 the company announced that they intended to increase their ownership in Volkswagen to more than 50%. The announcement resulted in a steep increase of Volkswagen’s share price and immediate concerns among investors, that the company
In 2008, the largest “short squeeze” in the history, done by Porsche’s CFO to acquire control over Volkswagen through option contracts, had caused a huge loss for multiple hedge funds and investment banks in Germany. And meanwhile in 2007, until the beginning of 2008, TCI and 3G, 2 UK-based hedge funds, violated SEC disclosure requirements, hiding their objective to takeover CSX Corporation by entering into equity total return swaps with numerous investment banks. CSX was a one of the largest railroad and transport companies in Eastern US with returns exceed S&P during 5 years before the economic downturns, which made it attractive as a take-over prey.
This report provides an analysis on how derivatives could be used to gain corporate control, resulted in financial market imbalances, using Porsche and 3G & TCI cases. The report also assesses the regulatory system associated with OTC derivatives, valuable lessons regarding their uses to achieve a company selfish goals, risks and benefits of derivatives, involvement of hedge funds and investment banks in derivatives transactions, and evaluation on whether there should be stricter disclosure requirement on derivatives instruments and regulation banning the use of these instruments by CEOs.
Part I. Porsche vs. Volkswagen Case
Porsche, a luxury automobiles manufacturer, announced in 2005 that the company had intention to purchase 20% Volkswagen shares to support German politician’s plan of reducing foreign ownership and improve domestic investment as Volkswagen’s shares were majorly held by Lower Saxony (just over 20%) and the rest were freely traded in the market.
2 years later, Porsche increased its holdings in Volkswagen to 30% and by March 2008 the company announced that they intended to increase their ownership in Volkswagen to more than 50%. The announcement resulted in a steep increase of Volkswagen’s share price and immediate concerns among investors, that the company
References: Chesters, L. (2014). Market Report: Short Squeeze at Miner Kazakhmys Pushes Stock Up. Retrieved from http://www.independent.co.uk/news/business/sharewatch/market-report-short-squeeze-at-miner-kazakhmys-pushes-stock-up-9158838.html European Security and Market Authority. (2014). European Market Infrastructure Regulation. Retrieved from https://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR McNicholas, M. (2012). Porsche 's Big "Squeeze" and Porsche 's Consequential Derivative Litigation. Retrieved from http://financial-fraud.blogspot.com.au/2012/07/porsches-big-squeeze-mother-of-all.html Securities and Exchange Commission. (2014). Amendments to Regulation SHO, 17 CFR Part 242, Release No. 34-56212; File No. S7-12-06, n.3. Retrieved from https://www.sec.gov/rules/final/2007/34-56212.pdf