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SEC subpoenas major prime brokers tied to hedge fund margin probe
The SEC’s subpoenas follow Situational Awareness’s 67% portfolio drawdown, and the prime brokers involved recently reported strong revenue growth and earnings beats.
An artificial intelligence-focused hedge fund named Situational Awareness suffered a 67% portfolio drawdown after a mid-summer sell-off in the semiconductor sector, prompting steep liquidation of public equities to meet margin calls, according to MarketBeat Ratings.
The U.S. Securities and Exchange Commission has since issued subpoenas to four major Wall Street prime brokers, seeking information on the timing of the fund’s trades, communications with lenders, and how the banks monitored aggressive leverage.
MarketBeat Ratings notes the immediate concern is not bank insolvency, but the possibility of forced deleveraging across markets if margin stress escalates.
To gauge the banks’ underlying financial capacity, MarketBeat Ratings points to recent results including Goldman Sachs, which beat consensus earnings per share estimates by over $6.50 and saw revenue rise nearly 40% year over year, along with JPMorgan Chase, which beat by about 55 cents per share with revenue up about 27%. It also cites share repurchase authorizations at Bank of America, about $40 billion, and Citigroup, about $30 billion, alongside normalized short interest levels across the four firms.