Ex-Porsche Executives’ Trial Sheds Light on a Family’s Rise at Volkswagen
FRANKFURT — A criminal trial in Germany has shed new light on how a billionaire family acquired ultimate power at Volkswagen in the years leading up to the carmaker’s emissions-cheating crisis.
Two former top managers of the Porsche family holding company — as part of one of the more spectacular financial maneuvers of the last decade — are accused of manipulating Volkswagen’s share price in 2008, according to evidence presented in the trial. On paper, at least, Volkswagen briefly became the most valuable company in the world.
The Porsche family went on to become Volkswagen’s majority shareholders. Prosecutors say the maneuver was part of a carefully planned takeover of Volkswagen that was even given an internal code name, “Project Bavaria.” In its aftermath, a German billionaire committed suicide, plagued by losses.
The Porsche family’s dominance of Volkswagen has come under scrutiny since the company admitted in September that it had rigged 11 million diesel vehicles to cheat on pollution tests. Investors and analysts say the Porsche family — descendants of Ferdinand Porsche, who invented the original Beetle “people’s car” — has helped perpetuate a corporate culture at Volkswagen that allowed the cheating to take place, and remains an obstacle to change.
Among critics of the Porsche family’s stewardship of Volkswagen is the fund that invests Norway’s enormous oil wealth, which has long complained that minority shareholders in Volkswagen were treated unfairly and denied information. “The problems in Volkswagen were illustrated by the disclosure that the company has provided incorrect emissions data,” the Norwegian Government Pension Fund said in a report last week.
The fund, one of the largest investors in the world, has a 1.2 percent stake in VW valued at $1.3 billion.
Documents related to the trial, some not previously available to the public, suggest that in 2008 the Porsche family could easily have lost its grip on Volkswagen, which it was trying to acquire. Volkswagen might have been taken over by a rival car company instead, or perhaps it would have more independent shareholders. But favorable share price movements — a result of illegal market manipulation, according to prosecutors — rescued the family fortune and paved the way for it to acquire a majority in Volkswagen.
Some analysts say Volkswagen’s shortage of independent shareholder oversight — 88 percent of all shares today are held by just three investors: the Porsche family (just over 50 percent), the Qatar government (17 percent) and the German state of Lower Saxony (20 percent) — could have created an atmosphere conducive to fraud because there were not enough critical voices on the board.
The emissions crisis “highlights serious corporate governance problems at Volkswagen,” Moody’s Investors Service said in a report this month. “These deficiencies include ineffective internal controls to uncover improper activity and poor risk management by VW’s management and supervisory boards.”
The fallout from the emissions crisis includes investigations in Germany, the United States and other countries, as well as lawsuits by shareholders and owners of Volkswagen diesel cars.
A central contention of the criminal trial, taking place at a state court in Stuttgart, is that two top officials at a Porsche family holding company set out to manipulate VW’s stock price to avert a decline that could have severely diminished the family’s wealth.
No Porsche family members are charged with crimes. Representatives of the family say the holding company, known as Porsche SE, had 3 billion euros in cash available in October 2008 and was not under threat. “The liquidity situation of Porsche SE was completely different than it has been portrayed by the state’s attorney,” Porsche SE said on Friday in response to questions.
But the most prominent member of the family, Ferdinand K. Piëch, 78, who was chairman of the Volkswagen supervisory board until last year, seemed to indicate during a 2012 television interview that the family wealth was in danger. “The first generation builds,” said Mr. Piëch, a grandson of Ferdinand Porsche.
“The second maintains,” Mr. Piëch continued. “My generation is the third. We normally destroy. In 2008, we almost did.”
The two managers on trial on charges of stock price manipulation, Wendelin Wiedeking, the former chief executive of Porsche, and Holger Härter, its former chief financial officer, deny the charges. Mr. Härter was convicted in 2013 of credit fraud in connection with attempts to arrange financing for the takeover attempt.
Prosecutors in the current case are scheduled to summarize their case on Thursday. A verdict by a panel of judges is expected by the end of the month.
The trial revolves around a few turbulent days in October 2008, soon after the collapse of the investment bank Lehman Brothers propelled financial markets globally into chaos.
Volkswagen shares were losing value fast. Speculators, anticipating a rout, swooped in and began betting that VW’s price would fall further by using a risky short-selling strategy in which investors sell borrowed shares in anticipation of buying them back later, at a lower price, and pocketing the difference. Compounding the risk, some sold shares that they hadn’t actually borrowed — a “naked” short that makes it even tougher to cover the bet later.
On Oct. 26, 2008, a Sunday, the Porsche holding company (which at the time owned Porsche the sports-car maker) issued a statement that German prosecutors now say 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 another 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, as well as 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 came as a shock to the investors betting that the stock would fall. They realized that if VW 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 weren’t enough available to buy, a situation known as a short squeeze.
On Tuesday, two days after the Porsche statement, Volkswagen’s share price 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 say the market panic was unwarranted. Porsche 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.
According to prosecutors, Porsche’s financial distress stemmed from the agreement it had made with Maple Bank, a niche investment bank that handled the options trades.
If Volkswagen shares fell below certain benchmarks, Porsche was obligated to post cash security with Maple Bank. The more the shares fell, the more Porsche had to pay.
By Oct. 24, 2008, Porsche had already had to post €4.3 billion and was down to its last €326 million, according to the indictment. If the shares rose, on the other hand, Porsche would get the money back and the pressure would ease.
The Oct. 26 news release gave no indication that the company was in a tight spot. Prosecutors contend that the omission of that crucial information misled investors and amounted to a criminal violation of German securities laws.
By some estimates, the speculators lost more than €5 billion on their bets against VW. One of the investors, Adolf Merckle, a German billionaire, committed suicide several months later by stepping in front of a train.
Lawyers for Mr. Wiedeking and Mr. Härter argue that they could not have known what the market reaction to the Oct. 26 statement would be. They argue that Porsche still had enough cash to fulfill its obligations. The lawyers also say that Mr. Wiedeking and Mr. Härter were open about Porsche’s intentions.
“Everything was always communicated correctly,” Mr. Wiedeking said in a statement to the court. “There was never any talk that Maple was going to quit the options strategy.”
Maple Bank was in the news again last week when German regulators ordered it to halt business because of doubts that it could cover debts of €2.6 billion, about $2.9 billion. A Frankfurt court on Thursday opened insolvency proceedings against the bank, which is under investigation for possible tax evasion in a case that does not involve Porsche. In a statement, Maple Bank acknowledged the regulators’ action and declined to comment further.
Martin Weimann, a Berlin lawyer who is president of a shareholder-advocacy group, said the Stuttgart trial exposed the weakness of investor protections under German law. “Germany runs the risk of looking like a banana republic,” Mr. Weimann said in an email. International investors, he said, “have already taken note of how long the case has taken to process and what a small role the rights of damaged capital-market participants play.”
Ultimately, Porsche’s takeover of Volkswagen failed, at least on paper. Instead, Volkswagen went on to buy Porsche.
But the deal left the Porsche family, via its holding company, with more than half of VW’s voting shares. In effect, the Porsche family traded a niche sports car maker for a majority stake in the world’s second-largest carmaker, after Toyota.