Melvin Capital is facing a wave of lawsuits from plaintiffs who allege that the hedge fund tangled up in the GameStop debacle has conspired to restrict trading for retail investors, causing them to lose money.
The investment firm founded by Gabriel Plotkin disclosed nine legal complaints in its most recent ADV filing, which social media investors on Reddit gleefully discussed at length this week. The complaints were first reported by Institutional Investor.
The suits accuse Melvin Capital and other market leaders of colluding to restrict retail trading in January, when a freeze on individual accounts trading shares of GameStop, AMC, and other so-called “meme” stocks had retail investors and regulators crying foul play.
The YouTube streamer known as Roaring Kitty, who helped drive a surge of interest in GameStop Corp , will testify before a House panel on Thursday alongside top hedge fund managers.
The House Financial Services Committee is examining how a flood of retail trading drove GameStop and other shares to extreme highs, squeezing hedge funds like Melvin Capital that had bet against it.
The witness list was announced on Friday by Representative Maxine Waters and includes Keith Gill, who also goes by Roaring Kitty, Robinhood Chief Executive Vlad Tenev, Citadel CEO Kenneth Griffin, Melvin CEO Gabriel Plotkin and Reddit CEO Steve Huffman.
Long-held strategies such as evaluating company fundamentals have gone out the window in favor of momentum. War has broken out between professionals losing billions and the individual investors jeering at them on social media. Meanwhile, the frenzy of activity is stirring regulatory and legal concerns, as well as the attention of the Biden administration. The White House press secretary said on Wednesday that its economic team, including Treasury Secretary Janet Yellen, is monitoring the situation.
The newbie investors are gathering on platforms such as Reddit, Discord, Facebook and Twitter . They are encouraging each other to pile into stocks, bragging about their gains and, at times, intentionally banding together to intensify losses among professional traders, who protest that social-media hordes are conspiring to move stock prices.
Author(s): Gunjan Banerji, Juliet Chung and Caitlin McCabe
It was a routine regulatory filing, the kind hedge funds must make every three months, where Melvin Capital first showed its hand.
The “Form 13F” filing that landed on August 14 last year listed 91 positions it held at the end of the second quarter, including shareholdings in household names from Microsoft and Amazon to Crocs and Domino’s Pizza. Halfway down the list: an apparently innocuous bet against GameStop, a struggling video game retailer.
That the New York hedge fund should think GameStop’s shares were going lower was hardly remarkable — many others were betting the same way. Wall Street analysts had sell ratings on the stock and the retailer’s prospects looked grim as gamers switched to downloads. But by using the options market for the bet, which forced it to disclose the position, Melvin had put a target on itself.
The failures we hear about are when staid institutions that have existed for centuries have done something incredibly risky, leading to serious consequences.
When it comes to institutional money management…. this kind of speculation is not really in keeping with professional standards, depending on the institution.
We may find that some institutions were betting the milk money by putting too much of their cash in very risky investment strategies. But really, only if they have to absorb the losses. Perhaps various players will save Melvin Capital et. al. You never know.
Writing for The Post this week, Charles Gasparino explained why the little guys got together to buy GameStop: “Mostly, they’re out to hurt the big guys.”
The Big Guys’ problem is that nobody likes them much. From Silicon Valley to Wall Street, they’re deeply unpopular with ordinary Americans, on both the left and the right, resentment they’ve stoked with selfishness, arrogance and condescension. Their solution to this unpopularity has been to use their control over online platforms, and their influence over the government, to silence their critics.
But they can’t stop the signal. No sooner did the tech giants collude to shut down Twitter alternative Parler than a new revolt sprang up somewhere else entirely among stock traders on Reddit. What will it be next? Truck drivers refusing to deliver food to Silicon Valley? Plumbers boycotting “woke” executives? It’ll probably be something cleverer and less foreseeable than that, but it’ll be something. The more the techno-elite tightens its grip, the more Americans will slip through its fingers.
The only thing “dangerous” about a gang of Reddit investors blowing up hedge funds is that some of us reading about it might die of laughter. That bit about investigating this as a “pump and dump scheme” to push prices away from their “fundamental value” is particularly hilarious. What does the Washington Post think the entire stock market is, in the bailout age?
America’s banks just had maybe their best year ever, raking in $125 billion in underwriting fees at a time when the rest of the country is dealing with record unemployment, thanks entirely to massive Federal Reserve intervention that turned a crash into a boom. Who thinks the “fundamental value” of most stocks would be this high, absent the Fed’s Atlas-like support in the last year?
$GME was first pitched as an investment on r/WallStreetBets about 2 years ago, but the current craze built up over the past 12 months.
Members on the subreddit r/WallStreetBets believed that GameStop, with 5k+ brick ‘n’ mortar locations, could turn around its fortunes by going digital.
On Aug. 31, 2020, Ryan Cohen — the billionaire founder of pet company Chewy — bought up a big position in $GME (he now owns 10%+ of it) with plans to modernize the company.
In the months since, a number of prominent hedge funds (Citron, Melvin Capital) revealed they were betting against (AKA short selling) $GME.
Typically in short selling, you: 1) borrow a stock; 2) sell it to a buyer; and 3) if the price of the stock falls, you can buy it for a cheaper price you sold it at and return the stock to the person who lent it to you.
One risk of short selling is called a “short squeeze.” Since you have to eventually return the stock you borrowed, problems can arise if there is a limited supply of the stock.
In a “short squeeze,” the underlying stock will get bid up as short sellers try to get their hands on stock that they have to return.
Options trading — the right, but not obligation, to buy a stock at a certain price — is also driving $GME up as institutions that sell these options are buying $GME stock to hedge their position.
$GME stock is on an upward tear as these market mechanics play out and r/WallStreetBets traders coordinate their efforts.
Melvin Capital, the hedge fund that was wrongfooted by retail traders who drove up shares in GameStop and other companies it had bet against, lost 53 percent in January, according to people familiar with the firm’s results.
The New York-based hedge fund sustained a $4.5 billion fall in its assets from the end of last year to $8 billion, even after a $2.75 billion cash injection from Steve Cohen’s Point72 Asset Management and Ken Griffin’s Citadel.
Less than a decade after the Bernie Madoff scam roped in the Wilpons and supposedly handcuffed the New York Mets payroll as a result, the team’s fans are panicking that new financial market weirdness in the form of bizarre trading in video-game retailer GameStop is going to harm new owner Steve Cohen’s ability to make the Mets amazin’ again.
Melvin Capital? It has lost perhaps 30% in January alone, as a series of short bets including GameStop turned bad, according to a report by the Financial Times.
In comes Steve Cohen. Melvin Capital founder Gabe Plotkin used to work for Cohen and already had $1 billion of Cohen’s money in his fund. To help Melvin weather its awful month, Cohen and another hedge fund billionaire invested another $2.75 billion into Melvin this month.
That in turn is why Mets fans are now freaking out. One Reddit poster claimed yesterday Cohen’s fresh capital must be gone, burned in Melvin’s desperate need to cover the short bet on GameStop. Suddenly, visions of a super wealthy new owner who could finally spend money on the team were replaced with another Wall Street catastrophe. Mets fans worried while GameStop pumpers teased Cohen.
Investors who sold GameStop short have lost $23.6 billion so far in 2021 through Wednesday, by the count of financial analytics firm S3 Partners. That includes $14.3 billion yesterday, as the retailer’s stock price shot up 135%.
In response to the controversy, Robinhood and Interactive Brokers Group curbed trading on GameStop, AMC, and several others Thursday morning. GameStop shares began to reverse direction. How long the restrictions would last was unclear. Frustrated amateur traders, of course, might just take their business to platforms that don’t limit them.
The pain is intense for these hedge funds. Citron Capital’s Andrew Left, often disparaged on Reddit, just said his firm folded a GameStop short bet, after losing 100% of its money spent on the transaction. Melvin Capital Management has slumped about 30% as the result of GameStop short sales, according to published reports. New York Mets owner Steve Cohen’s Point72 fund and Ken Griffin’s Citadel have stakes in Melvin.