In late October 2008 James “J.B.” Heaton III was teaching hedge fund litigation at Northwestern University School of Law when Porsche Automobil Holding SE shocked the financial world by announcing that it had secretly accumulated derivatives that, together with the shares it owned outright, gave it control over 74 percent of Volkswagen AG.
Hedge funds that had sold VW short and needed to cover their bets were caught in a classic squeeze, since there were not enough VW shares to go around. The stock price quintupled, VW briefly became the world’s most valuable company, and the short traders lost billions. Initially seen as a masterstroke, Porsche’s bold move would eventually backfire. Porsche and its lawyers understood the law but badly miscalculated the politics involved in making this deal. In the end, VW remained independent–and wound up owning Porsche.
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