The top US securities regulator is scrutinizing Melvin Capital Management’s risk controls and disclosures to investors after the hedge fund was decimated in a meme stock frenzy last year, according to a new report.
The Securities and Exchange Commission is investigating what Melvin founder Gabe Plotkin told investors after the fund lost $6.8 billion betting against GameStop stock during the frenzy, the Wall Street Journal reported Thursday.
Melvin had been one of Wall Street’s most successful hedge funds prior to January 2021, when the fund suffered billions in losses in a battle of wills against an army of retail investors on the WallStreetBets Reddit forum.
WallStreetBet users viewed Melvin as their nemesis for taking massive short positions in their beloved GameStop, a type of trade that would earn the fund a profit if the struggling video game retailer’s stock price had fallen.
Instead, small investors sent the stock skyrocketing, inflicting billions in losses on Melvin, and Plotkin announced earlier this year that the fund would close.
The Securities and Exchange Commission is reportedly investigating what Melvin founder Gabe Plotkin (above) told investors after the fund lost $6.8 billion betting against GameStop
GameStop’s shares soared in January 2021, and are well above their historical averages more than a year after an army of small traders pushed the price higher
Now the SEC is speaking to the investors who trusted Melvin with their money, and is seeking information on whether Plotkin and other executives misled them when trying to raise money after the meme binge, according to the Journal.
SEC spokesmen and Melvin did not immediately respond to requests for comment from Thursday night.
The SEC investigation is still in its early stages and may not result in an enforcement action, according to the Journal, which quotes people familiar with the matter.
WallStreetBets users responded with delight to the news, with u/Agitated-Maize-9126 commenting, “Ohhh jaaaaaaa [rocket emojis] expose every single one of the criminals.’
Still others were skeptical that the investigation would have teeth or result in anything other than a small fine.
“Investigation = SEC at lunch with the MC leadership. Go home then,” wrote u/Allaroundlost.
From 2014 to 2020, Melvin boasted compound annual returns of 30 percent, making Plotkin the envy of Wall Street.
But in May Plotkin announced his fund would close after suffering catastrophic losses.
“The appropriate next step is to wind down the funds by fully liquidating the funds’ assets and accounts and returning cash to all investors,” Plotkin wrote in a letter to investors, reported by Portal.
WallStreetBet users on Reddit considered Melvin their nemesis for taking massive short positions in their beloved GameStop
WSB users expressed delight at news of the probe but also skeptical that the probe would have teeth
Plotkin said the fund has been through an “incredibly difficult time” since the meme stock bloodbath in early 2021.
Plotkin had been the darling of Wall Street before the meme stick bloodbath
Melvin started 2021 with a net worth of $12.5 billion but ended the year down 39 percent after making a big bet against shares in GameStop.
Then the fund lost 23 percent in the first four months of 2022 as markets broadly declined and had just $7.8 billion in assets at the end of April, according to Portal.
In the letter, Plotkin said he had already raised a significant amount of cash and reduced the funds’ exposure.
Plotkin was previously a star trader at Steven A. Cohen’s hedge fund, then called SAC Capital Advisors.
But Plotkin left the company in 2014 to start his own fund after the SAC pleaded guilty to criminal insider trading charges.
His Melvin Capital quickly attracted attention and powerful investors, ending 2020, the year the pandemic began, with gains of 52.5 percent.
Melvin started 2021 with a net worth of $12.5 billion but ended the year down 39 percent after making a big bet against shares in GameStop
Powerful investors continued to support Plotkin for a while after the fund began bleeding money in the meme-stock frenzy, losing more than $1 billion a day at times.
Ken Griffin’s Citadel LLC and Point72 Asset Management, as Cohen’s fund is now known, invested billions in emergency funds in Melvin in early 2021 amid the meme stock losses.
Earlier this year, Plotkin told investors he wanted to restructure assets, shrinking them from around $8.7 billion to $5 billion and charge them lower fees for a period.
Investors reacted strongly to the proposals and Plotkin had to apologize not long after, saying he made a mistake.
In May, Plotkin said he had started liquidating the portfolio and would stop charging management fees from June 1.
He also said that he “gave all” he could, but that it wasn’t enough “to deliver the returns that one should expect.”