The SEC Subpoenas Major Banks Over Situational Awareness
The Securities and Exchange Commission (SEC) has subpoenaed Goldman Sachs, JPMorgan, Citigroup, and Bank of America regarding Situational Awareness, an AI-focused fund, according to the New York Times and CNBC. The SEC seeks trade timing data and communications about the fund's borrowing.
The subpoenas aim to gather information on:
- The timing of Situational Awareness' trades.
- Communications between the fund and lenders regarding its borrowing.
- Any documentation related to the San Francisco-based firm that the banks may possess.
Reportedly, all four banks were significant clients of the fund, with a regulatory filing suggesting substantial borrowings. However, the SEC does not necessarily imply any wrongdoing; an inquiry merely indicates a closer examination of high-profile funds with notable returns or sharp drawdowns.
A Situational Awareness spokesperson acknowledged the predictable nature of such regulator attention and expressed cooperation with any requests.
Disagreements Exist on Fund Size and Leverage:
The New York Times estimates the peak fund size at over $30 billion, while CNBC and the Wall Street Journal both put it at $45 billion. Regardless of the exact figure, leverage was a significant factor. The Journal reports that Situational borrowed approximately $3 for every $1 of capital, while CNBC mentions leverage reaching up to 400%.
Leverage Explains the Fund's Near-Collapse:
The SEC's interest centered on leverage, which became a critical issue when AI stocks declined in July. This triggered margin calls, leading to a fire sale of most of the public portfolio at a discount. Citadel acquired these positions, offloading roughly 80% of the risk since then.
Substantial Losses for Investors:
Jane Street suffered a record $15 billion monthly loss due to its exposure to Situational Awareness. Despite this setback, Jane Street continues its investment in AI-related sectors, leading Etched's $700 million funding round this month.
The fund had eight employees total, four of whom were investment professionals, according to The Financial Times.