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Regulator probes VW share trades

By Richard Milne in London

Published: October 29 2008 08:33 | Last updated: October 29 2008 15:01

Germany’s financial regulator has opened a formal investigation into possible market manipulation in Volkswagen’s shares after they first quadrupled and then nearly halved in value. 

The probe by Bafin came as Porsche continued the extraordinary rollercoaster ride in Volkswagen’s shares when it said on Wednesday it would sell 5 per cent of VW to try to avoid “further market distortions” that had threatened the survival of some hedge funds. 

Porsche, which sparked panic-buying among hedge funds by revealing at the weekend that it held up to 74.1 per cent in VW directly or indirectly, said it would settle hedging transactions up to 5 per cent in an attempt to nearly double the free float in Europe’s largest carmaker. 

VW’s shares, which had quadrupled on Monday and Tuesday alone to make it the second-largest company in the world by value, fell 37 per cent to €570. But that would still leave Porsche booking a handsome profit on any sale as it has said in the past that the average buying price for its VW stake was €70-€100. Shares in Porsche were 25 per cent higher at €57.80 

Max Warburton, analyst at Sanford Bernstein, said: “Porsche are set to shock the financial community yet again by making money – lots of money – out of this situation.” 

Some leading investors – led by DWS, Germany’s largest fund manager – have said that Porsche has manipulated the market. But Porsche said on Wednesday that it “denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves.” In a statement headlined: “Short sellers responsible for extreme price movements in Volkswagen”, Porsche said it wished to point out that the applicable capital markets law provisions had been “complied with at all times”. 

The surge in the German carmaker’s share price was triggered by Porsche’s revelation on Sunday it had a much larger interest in the carmaker than many traders had realised, sparking panic among hedge funds which had bet on VW’s share price falling. Porsche’s enlarged holding meant that there was a free float of only 5.8 per cent — the state of Lower Saxony has a 20.1 per cent stake — which sent traders rushing to cover short positions by buying stock from a shrinking pool of available shares. 

The squeeze on short-sellers is thought by many market participants to be the biggest in history and is likely to lead to large losses at many traders and perhaps even the failure of some hedge funds. 

Porsche said on Sunday that it held a 42.6 per cent equity stake, up from a previously-disclosed 35 per cent. In addition, it holds options over 31.5 per cent of VW shares but these settle into cash rather than convert into shares. Under German law, cash-settled options do not need to be disclosed. 

Regulators worldwide, including the Financial Services Authority in the UK, are grappling with how and whether to regulate cash-settled options. 

Bafin, Germany’s financial regulator, has said it is monitoring VW’s share price movements but has not launched a formal investigation. It has underlined that Porsche’s non-disclosure of its cash-settled options was legal. 

VW’s share price closed at €210 on Friday before soaring as high as €1,005 on Tuesday. 

Its fall on Wednesday meant the Dax 30 index of leading shares fell 2 per cent even though all other 29 members apart from VW rose, most of them by more than 10 per cent.

As a result of the distortion, Deutsche Börse, which operates the Frankfurt stock exchange, said late on Tuesday it would limit VW’s weight in the index, currently at 27 per cent, to 10 per cent.