In
this article I presented evidence of informed
trading activities prior to the terror attacks of
September 11, 2001 on areas of New York City and
Washington that resulted in the death of 2,996
people, including the 19 hijackers of four
commercial jets. (The four aircraft hijacked on
September 11 were American Airlines Flight 11,
American Airlines Flight 77 and UAL flights 175
and 93.) On the same
subject matter, Asia Times Online now presents
an
interview that I have
conducted with United States economist Paul
Zarembka.
Professor Zarembka is a
professor of economics at the State University of
New York (SUNY) at Buffalo. He has been the
general editor for Research in Political Economy
since 1977, and is the author of Toward a Theory of Economic
Development, editor of Frontiers in
Econometrics, and co-editor of Essays in Modern
Capital Theory.
He is working on the concept
and application of accumulation of capital.
Furthermore, he is an expert on Marxist theory and
economic development. In 2008, Zarembka edited the
book The Hidden History of
9-11, a serious reference volume that examines
9/11 and its background, showing how much remains
unknown and where further investigation and debate
is needed. His own chapter in the book includes
investigation of insider trading before 9/11 and
was updated in 2011 [1].
Lars
Schall: Professor Zarembka, how did you as
an economist became interested in the topic of
insider trading activities prior to the terror
attacks of 9/11?
Paul Zarembka: Well,
I did not got directly interested in it, I got
directly interested in 9/11 itself. That
eventually led to insider trading, and since I
specialized in econometrics it was the natural
thing for me to jump unto and investigate for
myself.
LS:Right after the
attacks, a fair amount of mainstream financial
media articles surfaced suggesting that there was
informed trading going on related to 9/11. Why do
you believe this reporting disappeared soon after
and was never seen again?
PZ:
That's a good question, and I'll tell you
what I think, but it's kind of speculative, I
can't know for sure. What I think happened was
that many people who were not involved in any way
whatsoever with 9/11 noticed the extreme levels of
put options in certain securities before 9/11.
That
is publicly available information, particularly if
you have the services that provide that data to
you. Some of these people noticed the extreme
volumes and they thought, I believe, that it would
lead to nailing [al-Qaeda leader] Osama bin Laden
as responsible for 9/11. So we've got a lot of
news coverage for about a month or two after 9/11,
and then suddenly it died. I think the reason why
it died - and that's speculation - is that somehow
the word got out that it's not going to lead to
Osama bin Laden.
LS: And so said the
9/11 Commission in its report.
PZ: Right, but that
was much later after it died, and I mean it really
died very quickly. On the other hand, the fact
that it got out there at all meant that the 9/11
Commission report had to say something about it.
They said something very minimal, but they said
something, and if hadn't been for those news
stories nothing would have probably got out about
it.
LS: What was the
position of the 9/11 Commission relating to
insider trading, and why do you think its
conclusions are unconvincing?
PZ: That's a big
question, perhaps bigger than you anticipated. Let
me go back a little bit to the history of
discussions about insider trading connected with
9/11.
The first scientific paper
that came out about it was from Professor Allen
Poteshman, who was at that time working at the
University of Illinois at Urbana-Champaign. His
article was published in the Journal of Business
which nobody can criticize for its respectability
and the integrity of its peer-review process, and
yet he came to the conclusion that there was
insider trading with high probability (nothing is
ever certain in statistics) in American Airlines
stock options and to a lesser extent in United
Airlines [2].
It was accepted for
publication, I think, around 2004, well before the
9/11 Commission report came out, but they did not
make any reference to it. I am not sure if they
knew or didn't know about it, but my guess would
be that they would have been informed that that
study had been done.
Now the 9/11 Commission made
its reports and said that they did investigations
throughout the financial world, I mean not just
only in the United States but also abroad, and not
just in put option trading but in other financial
instruments, and they concluded that they could
not find any evidence of irregular financial
transactions. In its
report, only two cases are actually cited, the two
cases that Poteshman had studied and written
about, namely in American Airlines put option
trading and United Airlines. However, the
commission provided almost no direct evidence of
what its finding was, but rather just made
assertions. So what the 9/11 Commission said is
basically worthless because it didn't give us any
evidence for its statement.
The
drama is magnified when two more studies were done
which again confirmed that insider trading took
place. Where it also gets dramatic is that in
2009, some parts of the investigation fed into the
9/11 Commission were released, and frankly I have
to tell you that at least for American Airlines
the report is convincing that there wasn't insider
trading in American Airlines.
I
say this not because it changes the final result
very much, but I think it is a deep warning to
everybody working on these kind of issues that
these issues are complicated, and that in the
final analysis the government has the data and has
knowledge we don't have - so some of what we are
doing is based upon hard facts, but some of it
speculates around things we don't have the hard
facts about.
LS: And then the
label "conspiracy theorist" raises its ugly head
very fast when you do speculate.
PZ:
Yes, and that's why I am not interested in
speculating. I try to say truthfully whatever I
discover. For example, Poteshman's results were
never a certainty, they were always stated as a
high probability. But from an econometric point of
view when you get results which have a probability
of 99% you take them very seriously.
And that leads us to something else. I have
enough experience in econometric issues which
were controversial to know that typically, when you
got controversial results, somebody else comes
along with a series of objections to the
methodology that you have used and you get a big
controversy.
No one ever responded to
Poteshman's article from a critical perspective,
and this is very curious. It's a major piece of
work, and he got the data actually from the
Chicago Board Option Exchange [CBOE] in a way that
the rest of us don't have; he got confidential
data for his work.
I suspect that the CBOE
wanted to find out if a methodology could be
developed which would be useful for checking into
insider trading in other incidents, not only in
this one, and I think that's why the CBOE gave him
the data. Whatever the reason is, he had data the
rest of us don't have. So it really was something
to investigate further, but his work was never
challenged. And then we get two other papers which
actually more than reinforced what Poteshman said.
One of those papers came from
two professors and a graduate student at the
University of Wisconsin-Madison, who studied
abnormal trading in the S&P 500 index options
prior to the 9/11 attacks. [3] Their study came to
the conclusion that there was a high probability
of insider trading in S&P 500 index options
prior to September 11.
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.
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