SEC Said to Subpoena Firms Over Trades Before U.S. Rating Cut

The U.S. Securities and Exchange Commission has sent subpoenas to hedge funds as part of an investigation into whether some investors traded on confidential tips ahead of Standard & Poor’s decision to cut the U.S. credit rating last month, a person briefed on the matter said.

The SEC’s probe is in its early stages and will likely focus on firms that made unusually large bets that markets would decline ahead of the rating company’s Aug. 5 announcement, according to the person, who spoke on condition of anonymity because the investigation isn’t public.

SEC inspectors have been scrutinizing S&P’s methods for making the downgrade and whether the firm followed its own procedures for keeping the information secret, according to another person with direct knowledge of the matter.

The subpoenas were reported previously today by the Wall Street Journal.

S&P lowered the nation’s AAA grade to AA+ last month after warning on July 14 that it would reduce the ranking in the absence of a credible plan to decrease deficits. The decision contributed to a global equity rout, including a 5.6 percent drop in the Dow Jones Industrial Average on Aug. 8, the first day of trading after S&P’s announcement.

U.S. officials have said the downgrade was based on a flawed analysis that overstated the nation’s debt by about $2 trillion, while S&P said the discrepancy doesn’t change projections that the U.S. debt-to-gross domestic product ratio will probably continue to rise in the next decade. S&P’s decision was at odds with the other two main ratings companies, Moody’s Investors Service and Fitch Ratings, which both said the U.S. continues to deserve the top credit rating.

“We have longstanding policies and procedures regarding the appropriate handling, use and protection of confidential information,” said Edward Sweeney, a spokesman for S&P.

To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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