Porsche Raided on Insider Trading Suspicions in Germany

by Stefan Theil

Porsche headquarters were raided by German investigators Thursday due to suspicions of insider trading by former CEO Wendelin Wiedeking, who was ousted last month following an epic takeover battle in which the luxury carmaker almost swallowed Volkswagen─Europe’s largest carmaker, which is more than 10 times Porsche’s size─before VW turned the tables. It is now set to gobble up Porsche instead.

In trying to buy up Volkswagen, Wiedeking had accumulated 43 percent of VW’s shares but secretly held options on another 32 percent. Porsche did not disclose the options until October 2008, roiling the markets. The company said yesterday that the trades were perfectly legal under German law.

Under Wiedeking, Porsche turned itself into something like a hedge fund that happened to make fast cars. In the first half of the company’s accounting year that ended March 31, Porsche reported $9.5 billion in profits from trading Volkswagen shares, versus the $700 million it earned by selling $4.2 billion worth of cars.

In trying to buy up VW, Wiedeking made a risky bet that ignored the wiles of Germany’s politicians, who guaranteed Volkswagen’s independence with a special law against a takeover, limiting each shareholder’s voting rights to 20 percent no matter how many shares he accumulates. The European Union has long declared the “Volkswagen Law” illegal but German Chancellor Angela Merkel supported a clever rewriting of the law that nominally met EU objections but kept the limits on outside shareholders intact.

Wiedeking made powerful enemies not just at Volkswagen but in Germany’s financial community as well. Banks and hedge funds massively shorted Volkswagen’s stock after it had been driven up by Porsche’s open share purchases. When Wiedeking dropped the bombshell of Porsche’s secretly held options, it became clear that only a handful of Volkswagen shares remained on the open market, and the shares soared yet again as the hedgies panicked to cover their shorts. For a while, Volkswagen was the world’s biggest company by market value. For the hedgies, it was a bloodbath.

As opposed to its tough tax laws, Germany’s handling of financial transparency and insider trading is not known for being particularly strict, other than intermittent crackdowns involving high-profile cases. BAFIN, the banking and securities regulating agency that launched the probe into Porsche, is under pressure for standing by while German banks piled into toxic assets on a scale comparable only to the U.S. and U.K.

The probe won’t affect VW’s takeover of Porsche. But it’s a sad end for Wiedeking, the wunderkind who turned Porsche from basket case to the world’s most profitable carmaker─before he got a little greedy.