Hedge Fund Litigation: Porsche’s Victory in Braunschweig

Here ist an update on the epic litigation battle that follows from Porsche’s failed take over of Volkswagen. Hedge funds try to recover losses suffered at the time and sue Porsche for billions of damages. The court cases have taken them on a Tour of Germany. Today, it was the Braunschweig District Court (Landgericht) which was scheduled to hand down decisions in three of the actions pending against Porsche.

However, in one action  (file no. 5 O 2068/12, an action for EUR  212 million), the claimant prevented the decision by asking, in the last minute, the Presiding Judge (Vorsitzenden Richter am Landgericht) Stefan Puhle, to recuse himself from the case, on grounds of bias (Befangenheitsantrag; Sec. 42 German Code of Civil Procedure, ZPO) The court’s press release does not discuss the reasons on which the challenge was based. While the date for a decision in this matter will be rescheduled after the challenge has been dealt with, Porsche was successful on the merits in the one of the smaller cases.

So first on today’s decisions:

In case no. 401/12, the Braunschweig Court discussed the various legal theories on which the claims were based, and handed down a final judgment dismissing the claims. The court found that the claims were not founded in tort (Sec. 823 para 2, 826 German Civil Code, BGB). Sec. 823 para 2 BGB would have required the claimant to show that there was criminal fraud (Betrug). Criminal fraud would have required a direct link between the alleged damages suffered by claimant and the corresponding gains of Porsche, when trading the Volkswagen options. This direct link was missing. For tort claims under Sec. 826 BGB, the claimants were not able to prove that there was causation between the ad hoc statements made by Porsche and the claimant’s decision to enter into the transactions that caused their losses.

Finally, the court decided that Sec. 37b, 37c Securities Trading Act (WpHG) could not be applied accordingly, since they relate to disclosure obligations on the issuer. However, as the securities in question were the Volkswagen shares, the issuer in is Volkswagen. The alleged misleading Information, however, originated from Porsche.

In line with the case law of the Federal Supreme Court (Bundesgerichtshof), the court also held that the provision against market manipulation (Sec. 20a WpHG) is not a “statute that is intended to protect another person” within the meaning of Sec. 823 para 2 BGB.

Without having seen the full judgment, on the basis of the court’s press release, it appears that the Braunschweig court is in line with both its own previous judgments, and the jurisprudence in Stuttgart.

The other matter may be heading for Hannover: In the matter 5 O 2433/12, the court did not issue a judgment, but issued an order (Hinweisbeschluss) that indicated how it would deal with an application to transfer the case to the District Court (Landgericht) Hannover. Hannover is the court in the Federal State of Lower Saxony with exclusive jurisdiction on anti-trust issues. The Braunschweig court stated that, on the basis of the facts pleaded, damages based on anti-trust violations appear possible. Therefore, a Transfer of the dispute to the Hannover court would be possible. The parties had one month to comment on the issue.

Finally, on the recusal issue:  Why the bias challenge now, and so late in the process? I understand that Judge Puhle retires at the end of this month. Against this background, it appears that the challenge was launched to have the matter dealt with by another presiding judge. As a panel of three judges (Kammer) hears the case, this would only have an effect, however, if the panel was split 2:1, and the new judge coming swings it in favour of the plaintiffs. From observers at the hearing, I understand that this does not appear to be very likely.

In addition, the recusal process will delay the entire case. The court decisions both in Stuttgart and Braunschweig so far went against the claimants. It looks as if the claimants could gain the upper hand only if there was new evidence – and for new evidence they appear to rely on the parallel criminal proceedings against Porsche’s top management.

The Court of Appeals in Stuttgart did not grant them access to the criminal investigation files. The criminal trial would of course be public, but as the courts so far have refused to proceed to trial in the Volkswagen take-over case, this strategy has so far not worked out for the plaintiffs. Thus, the claimants need to buy themselves more time in the hope of the prosecution getting the court’s decision overturned upon judicial review, and bringing the matter to trial eventually. There, the claimants must bet on a “smoking gun memo” or witness being unearthed.

In other parallel matters in Braunschweig (file no. 5 O 2077/11, seeking EUR 1,797 billion in damages, and 5 O 3086/11 for EUR 351 million), new lawyers were instructed by the claimants. The original hearing date in May 2014 was rescheduled for December 10, 2104. Finally, a case that has already made it to Hannover is scheduled a hearing there on October 14, 2014..

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