Soros, Paulson Hedge Fund to be Investigated for Bets Made on Demise of the Euro

The U.S. Justice Department has launched an investigation into whether heavyweight hedge funds including Soros Fund Management, SAC, Greenlight Capital and Paulson & Co.  aggressively shorted the euro in recent weeks to destabilise it, the WSJ reported on Wednesday, citing people familiar with the matter.

According to the paper,  the department has asked hedge funds to retain trading records and electronic communications relating to the EU currency which needless to say has come under strong selling pressure as a result of the Greek debt crisis. The euro has lost more than 10% since November. It currently trades at $1.3609.

The Journal article disclosed that the big euro bets — some observers estimate that traders and hedge funds have bet nearly $8 billion against the euro — were emerging amid gatherings including an “idea dinner” involving a number of hedge funds, where a trader argued that the euro is likely to fall to “parity,” or equal to, against the dollar on an exchange basis (very low interest rates have made the funding of massive block trades more feasible.)

At one such gathering, a dinner on Feb. 8 at a Manhattan restaurant, an SAC portfolio manager, notes the Journal, said he believed the euro will continue bleeding and urged other traders to short it as his firm had, according to people at the dinner. The size of the bets against the euro is unclear.

One of the questions investigators will most likely examine at this point is whether such information-sharing amounts to ‘collusion’, which implies that a secret agreement between the parties involved was made in order to undermine the currency. However, the Journal points out that charges relating to collusion on Wall Street have been a rarity because of the difficulty of proving that firms intentionally sought to act together and acted nefariously.

The reported Justice Department probe comes at a time when financial institutions are facing scrutiny over their role in the Greek financial crisis.

Critics accuse Wall Street firms of exacerbating the crisis by helping European governments mask their debts through derivatives deals from the budget overseers in Brussels to only benefit later from them by driving down the value of securities related to them. Moves that are reminiscent of the trading action at the height of the financial crisis like bets against Lehman Brothers and other troubled firms.