SEC probes Melvin Capital after hedge fund lost $6.8B in meme-stock frenzy

The top US securities regulator is probing Melvin Capital Management’s risk controls and investor disclosures after the hedge fund was decimated in last year’s meme-stock frenzy, 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 by betting against GameStop shares during the frenzy, the Wall Street Journal reported on 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 small investors on the Reddit forum WallStreetBets.

WallStreetBet users considered Melvin their arch-nemesis for taking out 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 share price had fallen.

Instead, small investors drove the stock to dizzying heights and inflicted billions in losses on Melvin, and Plotkin announced earlier this year that the fund would shutter.

Shares of GameStop soared in January 2021, and remain well above their historical averages more than a year after an army of small traders drove the price up

Now, the SEC is speaking to the investors who entrusted their money to Melvin, seeking information about whether Plotkin and other executives misled them as they tried to raise money following the meme-frenzy, according to the Journal.

Spokespersons for the SEC and Melvin did not immediately respond to requests for comment from DailyMail.com on Thursday evening.

The SEC probe is still in its early stages and may not lead to an enforcement action, according to the Journal, which cited people familiar with the matter. 

WallStreetBets users reacted with glee to the news, with u/Agitated-Maize-9126 commenting: ‘Ohhh yeaaaaaa [rocket emojis] expose every last one of the criminals.’

Still, others were skeptical that the investigation would have teeth, or result in anything other than a minor fine.

‘Investigation = SEC having lunch with MC leadership. Then going home,’ wrote u/Allaroundlost.

From 2014 to 2020, Melvin boasted average annualized returns of 30 percent, making Plotkin the envy of Wall Street. 

But in May, Plotkin announced his fund would shutter after suffering ruinous 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 Reuters. 

WallStreetBet users on Reddit considered Melvin their arch-nemesis for taking out massive short positions in their beloved GameStop

WSB users expressed glee at news of the probe, but also skepticism that the investigation would have teeth

Plotkin said that the fund had been through an ‘incredibly trying time’ since the meme-stock bloodbath in early 2021.

Plotkin had been the darling of Wall Street before the meme-stock bloodbath

Melvin started 2021 with $12.5 billion in assets, but ended the year down 39 percent after betting big against shares of GameStop.

Then the fund lost 23 percent in the first four months of 2022, as markets declined broadly, and had just $7.8 billion in assets at the end of April, according to Reuters. 

In the letter Plotkin said he had already raised a substantial amount of cash and cut the funds’ exposure.

Plotkin was previously a star trader at Steven A. Cohen’s hedge fund, which was then called SAC Capital Advisors.

But Plotkin left in 2014 to launch his own fund, after SAC pleaded guilty to criminal insider trading charges. 

His Melvin Capital quickly attracted attention and powerful investors and ended 2020, the year the pandemic began, with gains of 52.5 percent. 

Melvin started 2021 with $12.5 billion in assets, but ended the year down 39 percent after betting big against shares of GameStop

As the fund began bleeding money in the meme-stock frenzy, losing more than $1 billion a day at one point, powerful investors continued to back Plotkin for a time.

Ken Griffin’s Citadel LLC and Point72 Asset Management, as Cohen’s fund is now known, invested billions in emergency cash in Melvin in early 2021 amid the meme stock losses.

Earlier this year, Plotkin told investors he wanted to reorganize and shrink assets to $5 billion from roughly $8.7 billion and charge them lower fees, for a time. 

Investors reacted strongly to the proposals and Plotkin was forced to apologize not long after, saying he had made a mistake.

In May, Plotkin said he had begun the process of liquidating the portfolio and would stop charging management fees beginning June 1. 

He also said that he had ‘given everything’ he could but that it was not enough to ‘deliver the returns you should expect.’