Gabriel Plotkin’s Melvin Capital, the hedge fund at the center of the GameStop trading frenzy in January, is a defendant in nine lawsuits by retail investors alleging a conspiracy to limit trading that caused them to lose money.
The hedge fund revealed the existence of the lawsuits in its annual ADV filing with the Securities and Exchange Commission.
Melvin was famously short GameStop and lost more than 50 percent during January following a short squeeze orchestrated by a Reddit forum called WallStreetBets, whose members included retail investors in GameStop. As the stock soared, various online brokerages catering to those investors, including Robinhood, restricted buying shares of GameStop, among other stocks heavily shorted by Melvin.
Retail investors called foul, which so far has led to two Congressional hearings, including one where Robinhood CEO Vlad Tenev, Citadel CEO Ken Griffin, and Plotkin denied wrongdoing.
Still, Melvin and other market participants are facing investors in court. The lawsuits have been filed on behalf of investors in New York, California, Virginia, Illinois, and Texas.
One purported class action lawsuit, filed Feb. 8 in the Eastern District of New York, said its claims “arise from a conspiracy to deprive individual investors… of their ability to invest in the open market in the midst of an unprecedent[ed] stock rise so that defendants could shield themselves from incurring substantial losses as a result of their own high-risk short selling strategies.”
According to the suit, buying restrictions were only placed on retail investors, not institutional investors like the hedge funds named in the complaint that were “leveraged short” and had a vested interest in seeing the prices decline so they could cover their shorts at lower prices.
“Simply stated, retail investors are the David and institutional investors are the Goliath,” the plaintiffs alleged.
According to the complaint, following the market ‘s close on January 27, “after-hour traders continued to take more short positions in … [GameStop] thereby insinuating a [GameStop] sell off.”
Only institutional investors like hedge funds are allowed to trade after hours, the complaint noted.
The restrictions on purchases of GameStop came the next day, January 28, and the complaint alleged that the hedge fund defendants were thus able to cover their short positions “at artificially reduced prices.”
In its filing, Melvin said it “believes the complaints are without merit.” Previously the hedge fund said it closed out the entire short position on January 26, one day before the stock hit its peak closing price — and before brokerages prohibited the buying of GameStop shares.
“When this frenzy began, Melvin started closing out its position in GameStop at a loss, not because our investment thesis had changed but because something unprecedented was happening,” Plotkin said in his February testimony before the House Committee on Financial Services. “We also reduced many other Melvin positions at significant losses — both long and short — that were the subject of similar posts.”
As Melvin was pummeled by the trading frenzy, the hedge fund received a $2 billion investment from Citadel, which Plotkin insisted in his House testimony was not a bailout.
But the firm’s ADV filing indicates that it was highly leveraged going into the GameStop debacle. Melvin had regulatory assets under management — which includes leverage — of $24.5 billion at the end of 2020, according to the ADV, filed March 8.
Assets have fallen significantly this year. After the Melvin Capital Master Fund fell 54.4 percent in January, according to a letter to investors seen by Institutional Investor, the fund had assets of $6.26 billion. Total firm assets were approximately $8.26 billion at that time. Some $2.75 billion of that came from Citadel and Point72 Asset Management, which put in $750 million.
Citadel Securities, whose majority owner is Griffin, buys order flow from Robinhood. Citadel also held a small GameStop short, according to its most recent 13F filing.
“I want to be perfectly clear: We had no role in Robinhood’s decision to limit trading in GameStop or any other of the ‘meme’ stocks,” Citadel’s Griffin said in his testimony before the House committee. “I first learned of Robinhood’s trading restrictions only after they were publicly announced.”
At the hearing, Robinhood’s Tenev said the firm was forced to institute the trading restrictions because clearinghouses demanded more collateral.
“We don’t answer to hedge funds,” he said.
For its part, the lawsuit filed in the Eastern District of New York claims that hedge fund defendants “made misstatements about their role in the conspiracy to the public.”
