SEC subpoenas banks over AI fund's leverage

The U.S. Securities and Exchange Commission (SEC) has subpoenaed four major banks—Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America—seeking information about their lending to Situational Awareness, an AI-focused investment fund that nearly collapsed in July after a leveraged bet went wrong Source: The Next Web. The subpoenas request details on the timing of the fund's trades and its communications with lenders, and instruct the banks to preserve related records Source: The Next Web. The SEC has not accused anyone of wrongdoing, and an inquiry does not necessarily lead to enforcement action Source: The Next Web. A fund spokesman said it is a "highly regulated business" and will cooperate fully Source: The Next Web.

The collapse

Situational Awareness was long AI supply-chain stocks and short traditional software companies. When AI stocks fell in July and legacy names rose, both sides of the trade moved against it, triggering margin calls and a fire sale of most of its public portfolio Source: The Next Web. Citadel bought the positions at a discount of around 10% and has since offloaded roughly 80% of the risk Source: The Next Web. The fund's backers suffered heavy losses: Jane Street lost about $15 billion, its worst monthly loss ever Source: The Next Web.

Disputed figures

Sources disagree on the fund's peak size. The New York Times puts it at more than $30 billion, while CNBC and the Wall Street Journal report $45 billion Source: The Next Web. CNBC says the fund fell to around $10 billion in late July, and Reuters reported a 67% drop for the month Source: The Next Web. On leverage, the Journal reports the fund borrowed about $3 for every $1 of capital, while CNBC cites leverage up to 400% Source: The Next Web.

Regulatory context

The SEC's focus on leverage is central, as it turned a bad month into a near-collapse Source: The Next Web. The fund operated with only eight employees, four of them investment professionals, a detail regulators often scrutinize Source: The Next Web. The inquiry is part of a broader regulatory environment where high-profile funds face increased scrutiny Source: The Next Web.