Point G-2: A Claim that there was No Insider Trading in Put

Options before September 11, 2001

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Introduction

In the first month after 9/11, there was rather widespread commentary in the press that persons had made enormous profits from foreknowledge of the attacks.1


The Official Account

In 2004, The 9/11 Commission Report wrote: “Highly publicized allegations of insider trading in advance of 9/11” have been made, and there was “[s]ome unusual trading” involving “put options – investments that pay off only when a stock drops in price.”2 However, the Commission said: “Exhaustive investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions.”3

For example, “the volume of put options . . . surged in the parent companies of United Airlines on September 6 and American airlines on September 10,” and this was “highly suspicious trading on its face.” However, ”further investigation has revealed that the trading had no connections with 9/11. A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10.”4


The Best Evidence

There are three reasons to reject the 9/11 Commission’s claim that it refuted the belief that huge profits were gained through foreknowledge of the 9/11 attacks.

First, the 9/11 Commission did not show that there was no insider trading based on foreknowledge about the 9/11 events, but simply asserted this.

Second, the Commission used a circular argument with regard to United Airlines: In stating that most of the United Airlines put options were purchased by an investor “with no conceivable ties to al Qaeda,” the Commission simply presupposed that 9/11 was planned and executed solely by al-Qaeda and that no one else had any advance knowledge of the attacks.

Third, econometricians – who use statistical analyses to produce objective results in economics – have published studies showing the occurrence of very unusual trades shortly before 9/11 that ensured high profits, thereby revealing high probabilities of insider trading.

  • For example, an analysis of the purchases of put options on United and American Airlines between the 5th and 10th of September, 2001, carried out by a University of Illinois professor of finance and published in a well-established journal, concluded that the evidence was “consistent with the terrorists or their associates having traded ahead of the September 11 attacks.”5
  • Another econometric study published in a well-respected journal concluded that “abnormal trading volumes . . . provide credible circumstantial evidence in support of the insider trading claim.”6
  • A more comprehensive study, by professors at the Swiss Finance Institute and the Swiss Banking Institute,7 shows that 15 million dollars were likely obtained by insiders using put options for Boeing, Merrill Lynch, J.P. Morgan, Citigroup, and Bank of America stocks.8

These econometric investigations, which appeared in 2006, 2010, and 2011, have not been challenged in any professional or governmental responses.


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References for Point G-2

1 For example, the BBC one week after 9/11 stated: “The City watchdog, the Financial Services Authority, has launched an inquiry into unusual share price movements in London before last week’s atrocities. The [London] Times reports that the American authorities are investigating unusually large sales of shares in airlines and insurance companies. There are said to be suspicions that the shares were sold by people who knew about the impending attacks” (“Papers Salute New York Stock Exchange,” BBC News, 18 Tuesday September, 2001.

3 Ibid., 172.

4 Ibid., 499, n. 130.

5 Allen M. Poteshman, “Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001,” Journal of Business, 79 (2006): 1703-26.

6 Wing-Keung Wong, Howard E. Thompson, and Kweehong, Teh, “Was there Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?” Multinational Finance Journal 15/1-2 (2011): 1-46, at 43.

7Marc Chesney, Remo Crameri, and Loriano Mancini, “Detecting Informed Trading Activities in the Options Markets,” Swiss Finance Institute Research Paper, 7 September 2011.

8 See Table 2 of Paul Zarembka, “Evidence of Insider Trading Before September 11th Re-examined,” International Hearings on the Events of September 11, 2001, 8-11 September 2011, Ryerson University, Toronto.


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