US SEC subpoenas Wall Street lenders over Situational Awareness meltdown, source says

The US Securities and Exchange Commission has sent subpoenas to Wall Street banks working with Situational Awareness to seek information about the fund's trades and use of leverage after its near-collapse last month, a source familiar with the matter told Reuters on Monday.

The AI-focused hedge fund was forced to sell most of its public equities portfolio to Citadel, after a broad selloff in global chip stocks roiled its leveraged bets.

The US regulator is probing the timing of the trades that triggered margin calls, alongside communications with the hedge fund's top lenders — including Goldman Sachs JPMorgan Citigroup and Bank of America — around its use of leverage for trades.

"It is to be expected that regulators would closely examine any funds that are high profile, produce significant returns, or have particularly dramatic drawdowns," Situational Awareness said in a statement.

"We are a highly-regulated business and will cooperate to the fullest extent with any regulatory request."

The SEC, Goldman, JPMorgan, Citigroup and BofA declined to comment. The New York Times was the first to report the development.

Such a regulatory inquiry does not necessarily result in enforcement actions, and requests for information alone do not imply that any of the firms are targets of an investigation.

Situational Awareness, launched in 2024, is run by former OpenAI researcher Leopold Aschenbrenner, whose viral essay on the future of the technology, lofty bets on AI-focused names and outsized returns from the fund propelled him into the spotlight.

Those bets, however, unraveled after a sweeping selloff in AI names jolted markets in July. The portfolio value of the fund had fallen 67 percent in July alone, it told investors last month.

"We came closer to permanent capital impairment than is acceptable to us," Aschenbrenner wrote in the letter to investors, adding that while the firm ultimately found a solution, it never intended to be in that position.

Hedge funds routinely borrow capital from lenders to magnify their bets, but those positions can reverse quickly when markets move in the opposite direction and prompt margin calls from prime brokers.

Reuters

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