The Securities and Exchange Commission is probing possible insider trading by hedge funds, specialized trading shops, and other firms ahead of the drop in the U.S. government’s long-term credit rating last month, The Wall Street Journal reported on Tuesday.
Traders with prior knowledge of the downgrade could have reaped huge profits by betting against the markets, which plummeted on Aug. 8 after ratings agency Standard & Poor's downgraded the U.S. to an AA-plus rating.
The Journal noted that the SEC may have trouble proving that anyone profited from insider information on the downgrade. The limping domestic economy and Europe’s woes might also have prompted traders to bet big against the market. Another challenge to the investigation is the wide variety of trading options traders and investors could have turned to in order to take advantage of insider knowledge.
"It was such an important event [that] the SEC would be remiss not to look at whatever evidence is available," former SEC enforcement lawyer Jacob Frenkel told The Journal. But "that civil investigation doesn't mean there was fraud. And even if there was insider trading, it could prove nearly impossible to bring a successful case."