PORSCHE SE's use of options to build a stake in Volkswagen AG took advantage of flaws in German securities laws and companies should be forced to disclose transactions sooner, lawyers and investors said yesterday.

German capital market rules don't require companies to disclose holdings until they have a legal right to acquire the stock, said Thomas Moellers, a capital markets law professor at Germany's Augsburg University. Schaeffler Group earlier this year similarly used swap rights to acquire 28 percent of Continental AG before disclosing a takeover bid.

'Porsche was able to use a loophole here, and the lack of transparency distorted the DAX and led to unfair losses by others,' Moellers told Bloomberg News. 'This example, like the Schaeffler-Conti case, shows that regulatory action is needed.'

Porsche revealed on Sunday that it held 42.6 percent of Volkswagen AG's shares and had secured so-called cash settled options for another 31.5 percent. Volkswagen shares soared almost fourfold the following two days and trading in Volkswagen is being probed by BaFin, Germany's financial market regulator. Germany's benchmark DAX index rose 12 percent on Monday and Tuesday as Volkswagen's shares were pushed up by the Porsche bid.

The tactics have revived criticism that German rules are too lenient. Schaeffler's move to employ swaps in the Continental takeover prompted companies including E.ON AG and Daimler AG to urge the government in July to strengthen disclosure standards.

Frank Gaube, a spokesman for Porsche, declined to comment. He has said previously that the company rejected allegations that it manipulated Volkswagen's share price or that it violated securities laws.

Short Sellers

Volkswagen rose 12 euros (US$15) to 512 euros in Frankfurt trading at 10:24am yesterday. Porsche fell 1.57 euros to 65.42 euros.

Short sellers, who bet that Volkswagen's price would fall, were forced to buy from a shrinking pool of Volkswagen stock to close their positions in a so-called short squeeze. Short-selling occurs when investors borrow shares and then sell them on the hope that the price will fall.

'The short-sellers got the sharp end of this stick, but the general point is it is not just an issue for short-sellers, but also for the traditional long-term investor,' said George Dallas, corporate governance director at F&C Asset Management Plc.

'Majority control by Porsche was achieved without the minority shareholders being aware, and the market and share price distortions that resulted from the limited free float of shares are not the type of thing long-term investors would like to see,' he said.