SEC subpoenas 4 banks as AI fund's 67% collapse draws scrutiny

The SEC subpoenaed four major banks over the 67 percent collapse of AI hedge fund Situational Awareness, a probe that could reshape how leveraged AI funds operate.

"It is to be expected that regulators would closely examine any funds that are high profile, produce significant returns or have particularly dramatic drawdowns," a Situational Awareness spokesman said. "We are a highly regulated business and will cooperate to the fullest extent with any regulatory request."

The subpoenas seek details on the timing of Situational Awareness's trades and its communications with lenders about borrowed money, according to the New York Times. The fund managed more than $30 billion at its peak, borrowing tens of billions more to increase bets on AI-linked chip stocks. Returns exceeded 1,000 percent from launch through June 2026. By end of June, SanDisk and Micron positions totaling $11.3 billion represented more than 56 percent of its U.S. portfolio. SanDisk fell nearly 47 percent and Micron dropped roughly 29 percent in July, triggering margin calls and a forced sale of the public equity book to Citadel at a roughly 10 percent discount.

The investigation, still in its earliest stages, could lead to fines or new disclosure requirements for AI-focused funds. The fund retained its private stake in Anthropic, which is targeting an IPO at a valuation of up to $2 trillion — a position that could determine whether Situational Awareness survives the regulatory scrutiny.

Founded in 2024 by Leopold Aschenbrenner, a former OpenAI researcher who is now approximately 26, Situational Awareness grew from a viral essay into one of the most aggressive funds in the AI trade. The fund operated with roughly 4x leverage — borrowing about three dollars for every dollar of investor capital — and its offering documents reportedly imposed no limits on leverage usage or position concentration. Protective put options worth $8.5 billion in March had largely disappeared by June 30, replaced by $12.5 billion in outright long positions, according to regulatory filings. Aschenbrenner wrote to investors that the fund "came closer to permanent capital impairment than is acceptable to us."

When AI stocks reversed in late July, the fund faced margin calls. Citadel stepped in and purchased the public equity book at a roughly 10 percent discount. Ken Griffin told clients in a letter dated August 21 that Citadel had already unwound more than 80 percent of the aggregate risk, executing more than 100 block trades worth over $4 billion in three weeks. Citadel's flagship Wellington fund posted a 5.94 percent return in July, its best monthly performance since 2022.

The broader AI correction was severe. The NYSE Semiconductor Index fell more than 21 percent in dollar terms in July. South Korea's market dropped 22 percent and Japan fell more than 8 percent. Major Asian multi-strategy hedge funds lost 3 percent to 9 percent in July, erasing much of their 2026 gains.

The SEC's investigation fits a broader regulatory push on AI in finance. The agency charged Rimar Capital in October 2024 for making false and misleading statements about its use of AI, and charged Two Sigma in January 2025 for failing to address known vulnerabilities in its investment models. The SEC's 2026 Examination Priorities identified AI as a top focus area, and the agency has been requesting information from financial firms about their AI practices.

The subpoenas also touch on the fund's crypto-linked exposure. Situational Awareness held approximately $1.99 billion in bitcoin miner stocks — including Core Scientific, Riot Platforms and IREN — which represented about a quarter of its book in its final 13F filing. Those positions were unwound as part of the Citadel purchase.

Leverage Questions Extend Beyond One Fund

JPMorgan chief executive Jamie Dimon warned this month that margin debt hit record levels, highlighting concerns about hidden borrowing across markets. The SEC's investigation into Situational Awareness could reveal how long the four banks funded one concentrated AI bet before withdrawing credit — and whether any disclosure failures occurred.

The fund still holds its private stake in Anthropic, where Aschenbrenner's wife serves as chief of staff to CEO Dario Amodei. Anthropic is targeting an IPO at a valuation of up to $2 trillion, which could provide a substantial lifeline.

This article is for informational purposes only and does not constitute investment advice.