By DAN REYNOLDS, senior editor of Risk & Insurance®
A federal lawsuit filed in New York in late January will likely keep the attention of the financial sector for quite some time, and may even someday play a significant role in the directors' and officers' (D&O) insurance market.
On Monday, Jan. 25, four U.S.-based hedge funds filed a civil lawsuit in U.S. District Court in New York against German automaker Porsche AG and two of its executives, charging that it deliberately hid its intentions in 2007 and 2008 to acquire a controlling stake in Volkswagen.
In their 46-page complaint, the hedge funds allege that they held short positions in Volkswagen, in essence betting that the automakers' stock price would fall.
They allege they then became the victims of a "short squeeze" in October of 2008, when Porsche unveiled its intentions to acquire a 75 percent stake in Volkswagen.
The plaintiffs allege that former Porsche President and CEO Wendelin Wiedeking and former chief financial officer Holger Haerter deliberately falsified the company's intentions in the financial press and manipulated the market by shielding their options trading.
On Sept. 26, 2008, Volkswagen's stock price stood at $257.79 per share; by October 31, 2008, when Porsche's intentions became clearer, Volkswagen's stock price was at $499.50 per share.
The plaintiffs--hedge funds Elliot Associates L.P., Glenhill Capital L.P., Glenview Capital Partners L.P. and Perry Partners, L.P.--allege that Porsche executives made millions even as investors got creamed. The complaint says that Wiedeking was compensated $113 million by Porsche in 2008 and Haerter $44 million.
Early estimates put the range of the potential damage claim from the hedge funds at between $1 billion and $10 billion.
But tracking the impact of the lawsuit will be difficult, because of its very uniqueness--that is, it's a case of U.S.-based hedge funds suing a German company.
"Obviously, this is a little more complicated than most situations we deal with here in the states because you have sophisticated people arguing what is the relevant securities regulations that should apply here," said Frank Baron, a senior vice president in the Management Solutions Group for Zurich North America Commercial.
Yes, the size of the damage claims could be huge, but Baron said that it's also hard to say what the intentions of the hedge funds are; whether they really intend to go to trial here or are just trying to see how much leverage they can gain with their suit and how much they can settle for.
"I think you are going to see other hedge funds and other companies looking to see how this case develops in the coming months and years," said Baron.
Hedge funds themselves are just a piece of the financial D&O picture. A more common occurrence is that investors would sue hedge funds, alleging that their directors didn't do what they said they would do.
As we know, for much of 2009, D&O coverage for the financial sector was one place where insurance premiums were on the pricy side.
An Aon Analytics report estimated, for example, that financial institutions D&O prices increased by 31 percent in the first quarter of 2009 over the first quarter of 2008 and 14.8 percent in the second quarter of that year compared with the previous year.
Financial sector D&O pricing only began to ease in the third quarter of 2009, increasing only 3.2 percent year over year.
This unusual case kicks things the other way, with a manufacturer being sued by financial entities.
If the Porsche case does go to court, the court finds in favor of the hedge funds and the claim ends up being in the $10 billion range, that could kick D&O settlements into higher gear because other hedge funds might be encouraged by those results.
No one can say for sure for now, but it is real money and people are watching.
"It goes into the mix, here is another segment that is in play," said Zurich's Baron.
January 29, 2010
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