BERLIN/FRANKFURT (Reuters)—A New York state court has rejected a motion by Porsche S.E. to dismiss a $1.4 billion-plus lawsuit brought by 26 hedge funds alleging fraud and unjust enrichment stemming from its trading in Volkswagen's shares four years ago.

Porsche S.E., a holding company, whose carmaking business in now owned by Volkswagen, said late on Wednesday it continued to believe the damage claims were without factual and legal merit, adding it would appeal against the decision.

"Porsche S.E. also continues to maintain that the New York Supreme Court is not an appropriate forum for the resolution of the hedge funds' alleged claims, and that their claims should be heard in Germany, where several of these funds have brought claims against Porsche S.E.," the company said in a statement.

James Heaton, a lawyer with Bartlit Beck Herman Palenchar & Scott, representing one of the hedge funds, Glenhill Capitalone, declined to comment.

Last week VW completed a two-step purchase of Porsche's sports car business, buying the remaining 50.1% stake it did not already own for almost &euro4.5 billion ($5.57 billion), plus a single ordinary share, to end a seven-year saga of feuding between the two branches of the firms' founding family.

But German and U.S. investors are accusing the sports carmaker's remaining financial holding company Porsche S.E. of having concealed a move in 2008 to acquire VW and of covertly amassing a majority interest in Europe's biggest carmaker.

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In 2007 and 2008, an ever-growing chasm in the value of VW's two stock classes, its ordinary shares and non-voting preferred shares caught the interest of hedge funds, who believed the common stock was massively overvalued, unless Porsche was planning to take control through a "domination agreement."

They began shorting the stock by selling borrowed shares, betting heavily that the price gap between the two classes of shares would narrow since Porsche has said it would be "unrealistic" for it to amass a 75% stake in VW, let alone the 80% needed under VW's bylaws for a domination agreement.

However, months later Porsche revealed it controlled options covering 31.5% of VW shares, with the options due for cash settlement, not physical delivery of the shares, and therefore not subject to shareholding disclosure rules. In addition Porsche already held a 42.6% stake in VW and since Lower Saxony held another 20% stake Porsche had all but cornered the market in the remaining shares because its banks held onto the physical shares to hedge their risk.

The holding company's statement of October 2008 caused VW's share price to jump fivefold to just over €1,000 ($1,239) within days, briefly making the Wolfsburg-based carmaker the most valuable company in the world as short sellers raced to unwind their bearish bets.

Although lawyers in Germany say the hedge funds have no case in alleging that Porsche S.E. executives deliberately misled markets, the lawsuits played a key role in ruining Porsche's plans later on in the saga to be folded into Volkswagen.

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Instead, having turned the tables on its smaller relative, VW decided to purchase outright Porsche's sports car business and not the holding company, Porsche S.E., leaving Porsche's original owners stuck with the lawsuits and a company trading at a discount to the value of its VW stake.

The New York court's decision to allow hedge funds to proceed with their case will merely extend the legal process in the United States, at least until the end of next year, without increasing the plaintiffs' chances of success, said Albrecht Denninghoff, Frankfurt-based analyst at Silvia Quandt Research.

"I can't comprehend how the plaintiffs believe they're pushing a solid case," he said, pointing to doubts about the suitors' claims that Porsche withheld relevant information about its stock-building plans.

He also said the verdict was surprising since a U.S. district court had already dismissed a separate case brought by 46 funds seeking more than $2.5 billion in damages from Porsche S.E. in December 2010.

Similarly, a German judge raised doubts about investor cases against Porsche S.E. that were heard at a court in Braunschweig on June 27. Investors including U.S.-based Elliott Associates are claiming for more than €4 billion ($4.95 billion) as a result of the Stuttgart-based company's actions to boost its VW holding. A ruling on two cases is scheduled for Sept. 19.