The U.S. Securities and Exchange Commission (SEC) has issued subpoenas to several Wall Street banks, investigating the near-blowup trading incident last month involving the AI hedge fund Situational Awareness. The New York Times first reported this on August 24, with Reuters later confirming the news from a person familiar with the matter.
Notably, the subpoena's focus is specific: it does not seek the fund's investment strategy, but rather two concrete items: the timing of these trades and the communication records between the banks and the fund regarding borrowing, essentially how leverage was negotiated. The subpoena also requires these banks to preserve all relevant information.
The subpoenas were received by the banks that provided funding: Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America. According to regulatory filings, Situational Awareness was a significant client of these four institutions. Both the SEC and the four banks declined to comment.
The fund issued a statement: "It is expected that regulators will closely examine any fund that achieves high visibility, generates significant returns, or experiences particularly sharp drawdowns. We are a highly regulated business and will cooperate with any regulatory request to the greatest extent possible."
The investigation is in its earliest stages and does not necessarily lead to fines or penalties. Situational Awareness has not been accused of any wrongdoing. Merely requesting information also does not imply that these banks themselves are targets of the investigation.
What Exactly Happened Last Month?
The fund was founded in 2024 by its founder, Leopold Aschenbrenner, a 24-year-old former OpenAI researcher. His lengthy article on the future of AI went viral, and coupled with the fund's early high returns, it thrust him directly into the spotlight. At its peak, Situational Awareness managed over $30 billion in assets, with hundreds of billions more in borrowed funds.
Its strategy was a combination considered very stable at the time: long on chips, short on traditional software companies—the logic being AI would take software's lunch, while chips would soak up all the demand. This logic shattered in July. The semiconductor ETF fell 21% that month, while software actually rose 4.4%. Both legs of the trade moved against it simultaneously, and the complex derivative instruments used by the fund to amplify gains were now magnifying losses.
In July alone, the value of the fund's portfolio dropped by 67%.
In a letter to investors, Aschenbrenner wrote: "We came closer to permanent capital impairment than we are comfortable with." He said the company ultimately found a solution but never intended to get to that point.
The solution was a discounted fire sale. It sold most of its public-market equity portfolio to competitor Citadel. On August 3, it offloaded approximately 4.62 million shares, a 3.42% stake, in the Japanese electronic components maker Taiyo Yuden via an over-the-counter transaction, with Citadel, Jane Street, JPMorgan, and Barclays taking the other side.
By August 21, Citadel told its own investors that it had unwound over 80% of the total risk from this portfolio, executing nearly 100 block trades involving a market value exceeding $4 billion.
According to the Financial Times, Aschenbrenner's $35 billion loss in July ranks among the top tiers of the largest trading losses on record.
Why is the Focus on the Banks?
Because the two items targeted by the subpoena—trade timing and leverage negotiation records—point not to the fund's own judgment.
A hedge fund losing everything by betting the wrong way is its own business, something the SEC typically doesn't regulate. What truly piques regulatory interest is something else: when such a fund was clearly on the verge of collapse, how much did its prime brokers providing leverage know, when did they know it, and did anyone rush to liquidate positions ahead of others? Following the 2021 Archegos blowup, it was the investment banks that were ultimately questioned, not the family office.
The subpoena's requirement to preserve information is another signal pointing in this direction. It suggests regulators believe these communication records could be useful later.
