Securities regulations have sent subpoenas to hedge funds and other trading firms to probe possible insider trading prior to the U.S. credit rating downgrade last month, according to a new report from The Wall Street Journal. Sources close to the matter told the paper that regulators are demanding more information about specific trades that bet on stock prices tumbling if the U.S. lost its AAA rating.
SEC Demands Information Regarding Stock Market Trades
According to WSJ, the U.S. Securities and Exchange Commission (SEC) is demanding more information about specific trades that were made very shortly before Standard & Poor’s (S&P) downgraded the country’s rating from AAA to AA+ on August 5.
In particular, the SEC is zeroing in on firms that bet the stock market would tumble if the nation suffered a downgrade.
S&P released a statement noted that the firm has “longstanding policies and procedures regarding the appropriate handling, use and protection of confidential information.”
A spokesman for S&P also told the paper that the firm has “robust policies that prohibit analysts or rating committee members from trading and holding securities or options of the companies or governments they rate.”
Funds and Firms Investigated Not Named
Unlike S&P, the SEC has not yet chosen to speak on the matter. So far, no funds or trading firms have been named in the alleged investigation.
According to sources, however, the subpoenas issued are said to be unusually broad. They are seeking information about why certain trades were made, who at the firms had heard first about the credit rating downgrade, how they got that information and when.
Some believe that if the the SEC finds insider trading actually occurred, they may have a difficult time proving it.
Because markets were already volatile in the days before the downgrade on speculation that S&P would cut the rating, it would be easy for funds and firms to prove that the general public was making trades based on this assumption.
