Page 1 of 2 9/11: Currency joins insider trades claims
By Lars Schall
In March 2012, Asia Times Online published my report of a special investigation that took a critical look at the issue of informed trading prior to the September 11, 2001, terror attacks in the United States (see Insider trading 9/11 ... the facts laid bare). I concluded at the time that there could be no dispute that speculative trade in put options - a contract in which the option purchaser bets that a stock will drop in value by a specified date - spiked in the days around 9/11 - even if the US Securities and Exchange Commission (SEC) and the 9/11 Commission will not say so.
More than a few people must have had advance warning of the
terror attacks, and they cashed in to the tune of millions of dollars.
Yet, the SEC concluded that this never happened. So I forwarded three weeks ago for this article the following inquiry to the SEC press department:
Dear Ladies and Gentlemen,
My name is Lars Schall, I am a financial journalist from Germany for Asia Times Online, Hong Kong. I write to you related to the findings of the 2002 Securities and Exchange Commission investigation of informed trading connected to the 9/11 terror attacks. The SEC review - entitled "Pre-September 11, 2001 Trading Review" - states,
"We have not developed any evidence that suggests that those who had advance knowledge of the attacks traded on the basis of that information. In every instance where we noticed unusual trading before the attack, we were able to determine, either through speaking directly with those responsible for the trading, or by reviewing trading records, that the trading was consistent with a legitimate trading strategy."
However, there are three scientific papers that come to very different conclusions:
Allen M Poteshman: "Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001", published in The Journal of Business, University of Chicago Press, 2006, Vol 79, Edition 4, page 1703-1726.
Marc Chesney, Remo Crameri and Loriano Mancini: "Detecting Informed Trading Activities in the Option Markets", University of Zurich, April 2010, online here.
Wing-Keung Wong, Howard E. Thompson und Kweehong Teh: "Was there Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?", published at Social Sciences Research Network, April 2010, see here.
Please let me summarize them for you just briefly.
In the first scientific study which had been carried out in 2006 regarding the put option trading around 9/11 related to the two airlines involved, United Airlines and American Airlines, US economist Allen M Poteshman from the University of Illinois at Urbana-Champaign came to this conclusion: "Examination of the option trading leading up to September 11 reveals that there was an unusually high level of put buying. This finding is consistent with informed investors having traded options in advance of the attacks."
Another scientific study was conducted by the economists Wong Wing-Keung (Hong Kong Baptist University, HKBU), Kweehong Teh (National University of Singapore, NUS), and Howard E Thompson (University of Wisconsin), whose findings were published in April 2010 under the title "Was there Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?" The authors looked at the Standard & Poor's 500 Index (SPX Index Options), in particular with a focus on strategies emanating from a bear market.
Basically, Wong, Thompson and Teh came to the conclusion "that our findings show that there was a significant abnormal increase in the trading volume in the option market just before the 9-11 attacks in contrast with the absence of abnormal trading volume far before the attacks".
More specifically, they stated, "Our findings from the out-of-the-money (OTM), at-the-money (ATM) and in-the-money (ITM) SPX index put options and ITM SPX index call options lead us to reject the null hypotheses that there was no abnormal trading in these contracts before September 11th."
Instead, they found evidence for "abnormal trading volume in OTM, ATM and ITM SPX index put options" for September 2001, and also in "ITM-SPX index call options" for the same month. "In addition, we find that there was evidence of abnormal trading in the September 2001 OTM, ATM and ITM SPX index put options immediately after the 9-11 attacks and before the expiration date. This suggests that owning a put was a valuable investment and those who owned them could sell them for a considerable profit before the expiration date."
From all of this, they took the position that whilst they couldn't definitively prove that insiders were active in the market, "our results provide credible circumstantial evidence to support the insider trading claim".
Moreover, the review of the SEC from 2002 states that the SEC looked at "broad and narrow indices". However, as Prof Paul Zarembka from the State University of New York, who has specialized in econometrics, pointed out in an interview with me for Asia Times Online related to the study of abnormal trading in the S&P 500 index options prior to the 9/11 attacks:
"What is very interesting about their results is that the underlying reports that were made available to the 9/11 Commission (which we didn't see until later) say that they could not examine the S&P 500 index options because trading in it is too extensive. Now why that becomes interesting is because the 9/11 Commission report had said that they made a wide-ranging study and they found no evidence of any sort of financial irregularities before 9/11, but also said the S&P 500 index options couldn't even be investigated - so the commission is kind of contradicting itself.
"And more than that, when some did investigate the S&P 500 index options, they find out that in fact it did have abnormal trading before 9/11, with high probability." (See: "Economists are scared" by Lars Schall, Asia Times Online, April 27, 2012.)
Different to the assessment of the SEC review of 2002 is also the scientific work that Chesney, Mancini and Crameri had published in April 2010 at the University of Zurich, "Detecting Informed Trading Activities in the option markets". In the segment that is dedicated to the terror attacks of 9/11, the three authors come to the conclusion, that there had been notable insider trading shortly before the terrorist attacks on September 11 that was based on prior knowledge.
Without elaborating on the detailed explanation of the mathematical and statistical method which the scientific trio applied during the examination of the put option transactions on the CBOE for the period between 1996 and 2006, I summarize some of their significant conclusions.
"Companies like American Airlines, United Airlines, Boeing" - the latter company is a contractor of the two airlines as aircraft manufacturer - "and to a lesser extent, Delta Air Lines and KLM seem to have been targets for informed trading activities in the period leading up to the attacks. The number of new put options issued during that period is statistically high and the total gains realized by exercising these options amount to more than $16 million. These findings support the results by Poteshman (2006) who also reports unusual activities in the option market before the terrorist attacks."
In the banking sector, Chesney, Crameri and Mancini found five informed trading activities in connection to 9/11. "For example the number of new put options with underlying stock in Bank of America, Citigroup, JP Morgan and Merrill Lynch issued in the days before the terrorist attacks was at an unusually high level. The realized gains from such trading strategies are around $11 million."
In a new version of their study that was published on September 7, 2011, the authors stuck to their findings from April 2010. They added the emphasis that in no way the profits gained with the put options to which they point could have been achieved due to sheer fortunate coincidence, but that in fact they were based on prior knowledge which had been exploited.
My question: How does the SEC comment on these scientific studies and their findings that contradict the assertion of the SEC (and subsequently that of the 9/11 Commission) that no individuals used foreknowledge to profit from the 9/11 terrorist attacks?
Furthermore, may I ask you for information concerning your response to a Freedom of Information Act request regarding the pre-9/11 put options that was submitted by David Callahan, the executive editor at that time of SmartCEO. The SEC responded:
"This letter is in response to your request seeking access to and copies of the documentary evidence referred to in footnote 130 of Chapter 5 of the September 11 (9/11) Commission Report. (...) We have been advised that the potentially responsive records have been destroyed."
My question: Why did the SEC destroy its records on the 9/11 insider trading issue?
Thank you for your attention! Kind regards, Lars Schall.
The response of the SEC to my inquiry was ... well, to make a short story even shorter: there was none. Thus, the issue remains pretty much unresolved - and should be treated in the field of research as a dramatic gap in the official narrative of the event going forward.
Another field of 9/11 research that deserves more attention is the issue of an astounding increase in currency in circulation a few weeks prior to 9/11. Connected to this question is also the case of William Bergman, a former senior financial market analyst at the Federal Reserve. He explained to me in an interview that I had published in September 2012 what caught his eye in terms of the M1 money supply increase of the US dollar in July / August 2001: