In another display of Wall Street morality, the Securities and Exchange Commission is investigating whether hedge funds made insider trades benefiting from Standard & Poor’s U.S. credit downgrade last month. According to the Wall Street Journal:
Securities regulators have sent subpoenas to hedge funds, specialized trading shops and other firms as they probe possible insider trading before the U.S. government’s long-term credit rating was cut last month, people familiar with the matter said.
Securities and Exchange Commission officials demanded more information about specific trades made shortly before Standard & Poor’s Corp. downgraded the U.S. to double-A-plus from triple-A on Aug. 5, these people said. SEC officials are zeroing in on firms that bet the stock market would tumble.
Those trades could have reaped huge profits when the Dow Jones Industrial Average sank 5.5% on Aug. 8, a 634.76-point decline in the first day of trading after S&P announced it yanked the government’s top-tier credit rating.
It isn’t clear which investment firms have received subpoenas, and an SEC spokesman declined to comment Monday. But the subpoenas are unusually broad, seeking information about why certain trades were made, according to a person familiar with the matter.
To win an insider-trading case related to the downgrade, SEC officials likely would need to show that an investor made trades as a direct result of a leak from officials at S&P or the Treasury Department who knew about the downgrade before it was announced.
The SEC has asked S&P which employees knew of the downgrade in advance. It isn’t technically illegal for rating firms to discuss their ratings and analysis with some groups, but the firms must have written policies preventing the misuse of information.
The investigation is not certain to produce results, but the news that Wall Street was still trying to profit from such an unfortunate situation — possibly through illegal means — is troubling in light of the anti-regulation majority on Capitol Hill.