The 2nd U.S. Circuit Court of Appeals on Friday said Porsche's alleged wrongdoing was "so predominantly foreign" that it could not be held liable in U.S. federal courts under domestic securities fraud laws.
It also said that the hedge funds might still "conceivably" show that U.S. laws should apply, and try to amend their lawsuit in Manhattan federal court.
The unsigned 48-page decision was issued 2-1/2 years after oral arguments.
It is the latest of several 2nd Circuit decisions to make it harder to pursue U.S. lawsuits over foreign conduct, since a 2010 U.S. Supreme Court ruling in Morrison v. National Australia Bank Ltd limited the reach of U.S. securities laws.
In various litigation, including some pending in Europe, hedge funds including Paul Singer's Elliott International LP and David Einhorn's Greenlight Capital LP sought to recoup about $2 billion of losses they blamed on Porsche's "massive short squeeze" in VW.
They claimed that during 2008, Porsche quietly bought most freely traded VW shares, despite publicly stating it had no plans to take a 75 per cent controlling stake.
When Porsche revealed such a stake in October 2008, shares of VW skyrocketed. This briefly made VW the world's largest company by market value, but caused losses for the hedge funds on swap agreements where they bet the share price would drop.
In December 2010, U.S. District Judge Harold Baer, who has since died, dismissed the hedge funds' federal lawsuit.
Upholding this ruling but on different grounds, the appeals court said the mere entering of swap agreements in the United States was by itself not enough to justify invoking Section 10(b) of the Securities Exchange Act, a widely used fraud law.
It said this was because the "foreignness" of the overall dispute might be so dominant that U.S. courts should stay out, or else risk putting U.S. and other countries' laws in conflict.
James Heaton, a partner at Bartlit Beck Herman Palenchar & Scott representing the hedge funds, did not immediately respond to requests for comment. A similar lawsuit in New York state court was previously dismissed.
"We're pleased with today's decision, which we think should finally end the U.S. litigation against Porsche," said Robert Giuffra, a partner at Sullivan & Cromwell representing Porsche. "Based on the court's reasoning, we don't see how the hedge funds can bring a valid U.S. securities fraud claim."
The case is Parkcentral Global Hub Ltd et al v. Porsche Automobile Holding SE et al, 2nd U.S. Circuit Court of Appeals, No. 11-403.