SEC launches investigation into claims of Melvin Capital misleading investors on meme stocks

Yahoo Finance reporter Alexandra Semenova details a new report that the SEC is investigating Melvin Capital for potentially misleading investors.

Video transcript

RACHELLE AKUFFO: Well, speaking of those meme stocks, Brian, the "Wall Street Journal" reports that Melvin Capital Management, one of the hedge funds that lost big in the meme stock frenzy, is now under investigation by the SEC. Yahoo Finance's Alexandra Semenova is here with the details. Alexandra, what can you tell us?

ALEXANDRA SEMENOVA: Well, that's right, Rachelle. Securities and Exchange Commission officials have contacted Melvin Capital's investors in recent months to determine whether the firm misled them about money it raised last year. That's according to that "Wall Street Journal" report that you cited, attributing it to people familiar with the matter.

The regulator is looking into whether Melvin Capital employed proper risk controls and investor disclosures after it lost millions of dollars last year in the-- sorry, in the WallStreetBets saga. Specifically, SEC officials are seeking information about what the fund disclosed about the risks associated with the investment strategy that it undertook. As a reminder, Melvin Capital is known for famously shorting GameStop and lost more than 50% in January 2021 after an army of retail investors orchestrated a short squeeze on Reddit's WallStreetBets forum.

BRIAN CHEUNG: Now, you know, Alex, this really complicates the picture for Gabe Plotkin over at Melvin because he's still trying to deal with the fallout of just closing the fund, right? So what's the update on that?

ALEXANDRA SEMENOVA: Indeed, Brian. This is yet another blow to Melvin Capital, which is already grappling with the closure of its fund after losing massively this year, adding to losses that already came after the WallStreetBets saga. In May, the firm said that it would liquidate assets and return cash to investors after this year's market route.

Mind you, Melvin Capital was once one of the best performing hedge funds on Wall Street. Gabe Plotkin was regarded as one of the best traders after continuously returning double digits for the fund. And it's fair to conclude that WallStreetBets traders pretty much sank this fund. So a big victory for retail traders this week, first with seeing all of the bounces in meme stocks, and then, of course, with this news about the SEC investigation.

BRIAN CHEUNG: I wonder if this gets the memers to actually like the SEC on this one, but.

ALEXANDRA SEMENOVA: Who knows? I mean, who do they hate more, Melvin Capital or the SEC?

BRIAN CHEUNG: We'll have to follow up on the Reddit boards, I guess.

ALEXANDRA SEMENOVA: Exactly.

BRIAN CHEUNG: Alex Semenova, thanks so much for the breakdown there. Appreciate it.