Federal appeals judges on Friday honed in on whether a U.S. Supreme Court ruling limiting securities fraud lawsuits barred a $2 billion case by hedge funds accusing German automaker Porsche SE of fraudulently cornering the market in Volkswagen AG shares in 2008.

Germany's Porsche won dismissal of the lawsuit in December 2010, when a trial judge in New York said 32 hedge funds, including Elliott Associates and Black Diamond Offshore Ltd, could not pursue the $2 billion lawsuit.

That judge, Harold Baer, cited the high court's June 2010 ruling in Morrison v National Bank of Australia Bank Ltd , which made it harder for investors to use U.S. courts to pursue securities claims involving alleged wrongful conduct overseas.

The hedge funds said they were victimized when Porsche

quietly bought nearly all the freely traded ordinary shares of Volkswagen as part of a plan to take over the company, contrary to its public statements that it had no plans to do so.

When Porsche revealed its holdings in October 2008, shares of VW soared, briefly making the company the world's biggest by market value. This caused a short squeeze and created losses for the hedge funds, which had entered swap agreements and would have benefited from a decline in price.

At an unusually long 80-minute hearing before a panel of the 2nd U.S. Circuit Court of Appeals in New York, Porsche's lawyer Robert Giuffra maintained that the Morrison ruling guided this case, prompting skepticism from the bench.

That does not mean it means what you say it means, Circuit Judge Pierre Leval said. We have to figure out what it means. To say we should follow Morrison, duh, we know that.

Leval and his colleagues on the three-judge panel, Robert Sack and Peter Hall, frequently questioned lawyers on both sides about the relevance of Morrison, without indicating how they might rule.

Baer had ruled that the hedge funds' swaps were essentially transactions made on foreign exchanges and markets and not domestic transactions warranting protection by U.S. courts.

James Heaton, a lawyer for the hedge funds, argued that the swaps were subject to section 10(b) of the Securities Exchange Act of 1934 because the transactions took place in U.S. territory.

After Morrison, it is that simple. The District Court's decision to the contrary was in error, the hedge funds' lawyers said in written briefs to the appeals court.

But Giuffra countered that a reversal of Baer's decision would result in ignoring the economic reality of what the transactions represent.

The case is Viking Global Equities LP et al v Porsche Automobile Holdings SE in the 2nd U.S. Circuit Court of Appeals in New York No. 11-397.

(Reporting By Grant McCool; Editing by Gerald E. McCormick)