The vitriol is revving up in New York, as a 2nd Circuit panel had an 80-minute hearing last Friday over whether Porsche Automobile Holdings SE illegally bought nearly all available shares of fellow automaker Volkswagen AG in 2008.

At issue is whether a U.S. Supreme Court ruling that limits securities fraud lawsuits should preclude the $2 billion lawsuit 32 hedge funds brought against Porsche. The German automaker won dismissal of the lawsuit in December 2010 when a trial judge cited the Supreme Court decision in Morrison v. National Bank of Australia Bank Ltd, which made it more difficult for investors to pursue securities claims over alleged wrongful overseas conduct in the U.S.

The hedge funds claim in Viking Global Equities LP et al. v. Porsche Automobile Holdings SE that Porsche covertly purchased nearly all of the available ordinary shares of Volkswagen stock as part of a plan to take over the company despite publicly making statements that it had no intention of doing so. Then, when Porsche revealed its holdings in October 2008, Volkswagen shares skyrocketed in value, resulting in a “short squeeze” that created losses for the hedge funds, which had swap agreements and would have profited from a decline in price.

During the hearing Friday, Porsche lawyers reiterated the relevance of Morrison. A lawyer representing the hedge funds disagreed, saying the district court erred, and that the swap agreements were subject to section 10(b) of the Securities Exchange Act of 1934 since the transactions occurred in the U.S., which would preclude it from falling under Morrison.

Reuters reports that the 2nd Circuit panel never indicated how it will rule.

For more, read Reuters.