The U.S. Securities and Exchange Commission (SEC) has issued subpoenas to several Wall Street banks to investigate the near-collapse of the AI hedge fund Situational Awareness last month. The New York Times first reported on this on August 24, with Reuters later confirming the news through a source familiar with the matter.
Of note is the wording of the subpoena, which does not seek information about the fund's investment strategy but two specific things: the timing of these trades and the communication records between the banks and the fund regarding lending, essentially how the leverage was negotiated. The subpoena also requests these banks to retain all relevant information.
The subpoenas were received by the banks that provided funding to the fund: Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America. According to regulatory filings, Situational Awareness was a significant client of these four banks. Both the SEC and the four banks have declined to comment.
A statement was provided by the fund: "Regulators closely scrutinize any high-profile, high-return, or particularly volatile funds, and this is expected. We are a well-regulated entity and will fully cooperate with any regulatory requirements."
The investigation is in its early stages, not necessarily leading to fines or penalties, and Situational Awareness has not been accused of any wrongdoing. Simply requesting information does not mean that these banks themselves are the target of the investigation.
What Happened Last Month?
This fund was established in 2024, and its founder Leopold Aschenbrenner is a former OpenAI researcher, currently 24 years old. His extensive essay on the future of AI once went viral, coupled with the fund's early high returns, thrust him directly into the spotlight. At its peak, Situational Awareness managed over $300 billion in funds and had borrowed hundreds of billions more.
Its strategy was considered the safest at the time: long on chips, shorting traditional software companies—AI taking over the software's domain, while chips cater to all the demand. This logic crumbled in July. Chip-related ETFs plummeted by 21% that month, while software surged by 4.4%. Both legs moved in the opposite direction simultaneously, and the complex derivatives used by the fund to amplify returns were now amplifying losses.
In one month, July, the fund's portfolio value dropped by 67%.
In a letter to investors, Aschenbrenner wrote, "We are closer to permanent capital impairment than we would like to be. He said the company eventually found a solution, but had never intended to let itself get to that point."
The solution was a fire sale. It unloaded most of its public equity portfolio to rival Citadel. On August 3, it offloaded approximately 4.62 million shares, representing 3.42% of Japanese electronics maker Sunon's equity, in a block trade with Citadel, Jane Street, JPMorgan, and Barclays.
By August 21, Citadel informed its investors that it had offloaded over 80% of the total risk from this portfolio, conducting nearly 100 block trades worth over $40 billion.
According to the Financial Times, Aschenbrenner's $35 billion loss in July ranks among the largest trading losses on record.
Why Target Banks?
Because the subpoena asked about two things — the timing of trades and leverage-related communications — both of which do not point to the fund's own decision-making.
If a hedge fund misreads the market and blows up, that's usually its own problem, and the SEC typically does not intervene. What truly piques regulatory interest is when, as a fund is visibly crumbling, the prime broker facilitating its leverage knows how much, when, and if anyone front-ran the unwinding. Following Archegos' meltdown in 2021, it was several investment banks that faced the most scrutiny, not the family office itself.
The demand for information retention is another signal in this direction. It signifies that regulators believe these communications may be useful in the future.
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