This is one of a series of articles on the recent events involving Melvin Capital, Robinhood, Reddit, and trading activity in specific investments. Vernon Litigation Group has years of experience representing investors, including high-net-worth families pursuing hedge fund-related claims like the Melvin Capital situation. We are especially concerned about any pension or retirement funds and smaller investors in this hedge fund. Some of our thoughts on this situation (from the perspective of Melvin Capital investors) are outlined below.
Red Flags: Melvin Capital and Other Hedge Funds
If you are an investor in Melvin Capital Management LP, you have major concerns about the massive losses related to the GameStop (GME) short squeeze. Additionally, you also have major concerns about the facts that are coming to light about the business practices of Melvin Capital and other hedge funds.
One red flag is the close connection between some of the biggest hedge funds. For example, Point72 Asset Management invests heavily in Melvin Capital, and the Chief Investment Officer (CIO) of Melvin Capital started his career at Citadel, another well-known hedge fund that invests heavily in Melvin Capital. Another red flag also involves the CIO of Melvin Capital who, just prior to starting Melvin Capital, was a subject of stories and investigations regarding allegations of insider trading in violation of the securities laws.
Another red flag (industry wide) is the amount of money that is paid to hedge fund operators, which materially reduces investor returns (e.g., the CIO of Melvin Capital has made as much as $300 million in one year and the total skim off the top by many hedge funds borders on ridiculous).
Hedge Fund Techniques and Business Practices
Melvin Capital is at the center of the recent controversy because of its problems related to effectively betting against certain troubled companies. This practice is common and can be very profitable for hedge funds, though it can effectively destroy weak companies in the process. As we all know, this predatory practice was very recently thwarted in a very high profile way by organized groups of investors outside of the hedge fund world, led by a group of online investors on various social media platforms.
As a result of this high-profile story, the troubling practices of hedge funds are now being more fully exposed to main street investors. For example, in the case of GameStop stock (GME), investors are troubled by the ability and practice of hedge funds selling an amount of stock in one company that exceeds the amount of that stock outstanding on the market. By doing this, hedge funds are able to further drive down the price of a stock they do not own and then buy it at a lower price to deliver the stock it previously sold at a much higher price.
Most are cheering on the outside investors who banded together through social media to teach hedge funds a lesson on their practice of destroying weak companies for their own profiteering. This may result in some positive changes from younger capitalists teaching the hedge funds a lesson, as well as regulatory changes due to practices that regulators and lawmakers can no longer ignore and condone through inaction.
What can I do as an Investor in Melvin Capital?
Our firm remains concerned about retail investors who were convinced to invest in Melvin Capital and are now suffering from the inaction and actions by Melvin Capital. For example, in terms of inaction, we are investigating whether and to what extent Melvin Capital hedged its outrageously speculative short position in GameStop (GME) and other significant short positions. This hedging technique is relatively inexpensive and can provide significant downside protection for the fund and the investors in the fund.
From our perspective, retail investors may have legal claims. One basis for these claims may be the combination of the hedge fund’s massive short activity without adequately hedging its position. As simple as it sounds, we are investigating the hedge fund’s failure to hedge.
One concern about any remaining pension funds, retirement funds, individual investors that are invested in Melvin Capital and related hedge funds is the possibility that other investors will try to exit and the fund will be gated or otherwise have redemptions suspended. Unfortunately, hedge funds typically have a lot of leeway in this regard, which is one of the reasons we are so critical of investment professionals who pitch hedge funds to individual high-net-worth clients, retirement funds, and pension funds.
Specifically, one of the inherent flaws in hedge funds is their ability to block redemptions for extended periods of time. In fact, our experience in representing hedge fund investors is that suspending an investor’s ability to liquidate, combined with regulatory involvement, often leads to further revelations of defects in the structure of the hedge fund, the management of the hedge fund, and revelations of negligence, breach of duty, and sometimes even fraud.
Additionally, retail investors in Melvin Capital need to keep in mind that Melvin Capital is very beholden to its biggest investors such as Citadel and Point72 for shoring up the fund. We suspect this allegiance exceeds Melvin Capital’s allegiance to retail investors, which in turn could hurt smaller investors in the fund.
Again, this is why we often represent whistleblowers and investors who are pitched illiquid and opaque hedge funds. Investment professionals need to be both competent and motivated to conduct thorough and effective due diligence on hedge funds before recommending them to high-net-worth clients. Issues involving liquidity, lack of transparency, underperformance, fees, insider trading, and risk levels are all issues that a real investment professional should take into account before even considering the propriety of recommending a particular hedge fund to a particular investor. This is crucial because investors rely on investment professionals for competent due diligence and advice consistent with long-term investing goals, especially with respect to these types of alternative investments.
Positives of this Development
The upside of this situation is that it continues to bring some of Wall Street’s wrongdoing to the attention of Main Street. As investor rights lawyers, it is our experience that the wrongdoing of the securities industry becomes more and more rampant as the markets rise. Since most investors do not notice or look for wrongdoing during a bull market, the securities industry is able to engage in a wider array of abusive practices and conflicts of interest that effectively reduce returns and increase risk to retail investors.
If you are a Melvin Capital, Citadel, or Point72 investor, or if you have knowledge and concerns about the operation of these funds, please contact us. At Vernon Litigation Group, you can call for a free consultation and talk directly to one of our attorneys with complete confidentiality to see if you might have a legal claim as an investor or whistleblower. Our website contains our contact information and also explains more about our firm and our mission to help individuals and businesses that are taking on big tech, big business, and big government.
Remember, whatever it is, let’s make sure our money and our information are working for us and not for somebody else.
Based in Naples, Florida, the attorneys at the Vernon Litigation Group have conducted aggressive nationwide investigations of hedge funds, structured products, fixed income products, non-traded REITs, and various securities fraud cases and Ponzi schemes. The firm's investigations and advocacy on behalf of investors have been featured in local, state, national, and international publications such as Forbes and AARP magazines. And, more specifically, the attorneys at Vernon Litigation Group have decades of experience representing high-net-worth investors in hedge fund related disputes.