It seemed impossible for things to get worse for Gabe Plotkin and his hedge fund Melvin Capital Management, but this failed company is the gift that keeps on giving. The Securities and Exchange Commission (SEC) has reportedly opened an investigation into Melvin's risk management policies and investor disclosures.
According to a report from WSJ, the SEC reached out to failed hedge fund Melvin Capital's investors in recent months. The focus of the investigation is on if the fund misled their investors when they raised money last year after their GameStop (GME) short position exploded in the firm's face. The SEC also wants to find out more information on the risk disclosures made by Gabe Plotkin's fund to its clients.
Melvin Capital Management shut down all hedge fund operations in May 2022, after its pivot to being a long-only fund also failed. After failing as both a long-short hedge fund and then as a long-only fund, Plotkin desperately pitched investors to yet one more pivot back to a short hedge fund. After receiving billions of dollars in a capital infusion to keep the firm afloat in January 2021, investors had clearly lost faith in Plotkin. The final straw was a huge $1.3 billion long bet on Facebook's stock that dropped nearly 50% in the first part of 2022.
Today's news of an SEC investigation into the disclosure of Melvin's positions comes against the backdrop of many European GME investors worried about their split dividend shares and the messaging from Depository Trust Company (DTC) has not inspired any confidence. GameStop's short interest was well above 100% last year, and the systemic lack of risk disclosure from funds, brokers, and market makers made matters much worse for everyone involved.
Time will tell if Gabe Plotkin and Melvin Capital Management broke the law, but the firm has already crapped out twice in an increasingly embarrassing manner. The washed up hedge fund and its manager may still have one more loss to recognize once the SEC investigation wraps up.
This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.
At the time of this article, Shacknews primary shareholder Asif A. Khan, his family members, or his company Virtue LLC had the following positions:
Long GameStop via GME shares
Long GameStop via GME call options