U.S., Germany, Japan Investigate Unusual Trading Before Attack
By Judy Mathewson and Michael Nol, Bloomberg Financial News, 18 September 2001
Washington, Sept. 18 (Bloomberg) -- Trading skyrocketed in options that bet on a drop in UAL Corp. and AMR Corp. stock in the days before terrorists crashed hijacked United and American airlines jets into the World Trade Center and the Pentagon.

Morgan Stanley Dean Witter & Co., which occupied 22 floors of the 110-story 2 World Trade Center, and Merrill Lynch & Co., with headquarters near the destroyed twin towers, also experienced pre- attack trading of 12 times to more than 25 times the usual volume in so-called put options that profit when stock prices fall, according to Bloomberg data.

Now, securities regulators in the U.S., Germany, Japan and Hong Kong say they are investigating whether terrorists raised money from insider trading on their knowledge of attacks that devastated New York's financial district and closed U.S. stock markets for four days.

``They not only set out to destroy capitalism, but also to beat us at our own game,'' said Duke University law professor James Cox. ``These are people who hate capitalism and see that you can turn capitalism against itself.''

Some airline, insurance, and brokerage stocks had jumps in the days before the Sept. 11 attack in so-called put options, which profit when a company's shares fall.

One day before two American Airlines jets were hijacked and crashed, for example, 1,535 contracts changed hands on options that let investors profit if AMR stock falls below $30 per share before Oct. 20. That was almost five times the total number of those October $30 put options traded before Sept. 10, according to Bloomberg data. AMR shares fell $11.70 today to $18.

`Terrorist Involvement'

Those 1,535 contracts were worth $1.6 million at today's closing price compared with $337,700 at the end of trading on Sept. 10, according to Bloomberg data. A contract represents options for 100 shares.

Similarly, October $30 put options for UAL soared, with 2,000 contracts traded on Sept. 6, three trading days before the attack. A total of 27 contracts had traded previously. UAL shares fell $13.32 today to $17.50. The 2,000 contracts were valued at $2.4 million today, compared with $180,000 on Sept. 6.

``We've heard those reports about terrorist involvement in our markets,'' U.S. Securities and Exchange Commission Chairman Harvey Pitt said in a statement. ``Our enforcement division has been looking into a variety of market actions that could be linked to these terrible acts including the subjects of the rumors.''

Trading records may help show whether Osama bin Laden or other terrorists were behind suspicious trading in airline, brokerage, and insurance stocks or options, and may help securities regulators trace a money trail to some of those responsible for the attacks at the World Trade Center.

Evidence of Murder Plans

``It's a matter of great interest to intelligence. To the extent we find this evidence, we shouldn't just focus on it as proof of insider trading but as evidence of a desire to commit murder and terrorism,'' said Columbia University law professor John Coffee.

Deutsche Boerse AG spokesman Frank Hartmann said that exchange and German regulators also are examining trading in stocks, options, and futures before the Sept. 11 attack. On Sept. 6 and Sept. 7, trading almost doubled the average for the past six months in shares of Munich Re, the biggest reinsurer. Initial spot checks had found nothing irregular, Hartmann said.

A spokeswoman for the Chicago Board Options Exchange declined comment.

Japan's Securities and Exchange Surveillance Commission is probing TOPIX futures trading at the Tokyo Stock Exchange and Nikkei futures trade at the Osaka Stock Exchange, SESC officials said, confirming an earlier Jiji news service report.

Hong Kong's stock exchange and the market regulator are also checking for unusual trading activities. Banking regulators told lenders to check suspicious accounts for any connections with alleged terrorist Osama bin Laden.

``There is no evidence of the reported involvement of Hong Kong in any money-harboring activity related to Osama bin Laden,'' said Jasmin Fung, spokeswoman for the Hong Kong Monetary Authority. ``However, banks in Hong Kong need to be aware of the issue.''

`Sophisticated Strategists'

The prospect of insider trading based on knowledge of the attacks suggests a good deal of sophistication on the part of far- flung terrorist networks, which may have used U.S. markets to raise money for more assaults.

``It sure presents these people on a whole different level as sophisticated strategists rather than religious zealots,'' Coffee said. ``I suppose from their standpoint ... they're trying to pay for future terrorist activities by profiting from their past terrorist activities.''

At Morgan Stanley, trading in October $45 put options jumped to 2,157 contracts between Sept. 6 and Sept. 10, almost 27 times a previous daily average of 27 contracts. Options to sell Merrill Lynch shares for $45 apiece before Sept. 22 had 12,215 contracts traded from Sept. 5 to Sept. 10, 12 times the earlier daily average of 252. Morgan Stanley shares fell $6.40 today to $42.50. Merrill Lynch shares fell $5.37 to $41.48.

Other brokerage and insurance companies where options trading surged include:

-- Citigroup Inc., which has estimated that its Travelers insurance unit may pay $500 million in claims from the World Trade Center attack. It had a jump in trading of October options that profit if shares fall below $40 apiece. Almost 14,000 of those options contracts were traded from Sept. 6 to Sept. 10 -- about 45 times the previous daily average. Citigroup shares fell $2.85 today to $39.60.

-- Bear Stearns & Cos., where investors traded 3,979 contracts from Sept. 6 to Sept. 10 on September options that profit if shares fall below $50. The previous average volume for those options was 22 contracts. Bear Stearns shares fell $3.79 today to $46.45.

-- Marsh & McLennan Cos., the biggest insurance brokerage, which had 1,700 employees working in the World Trade Center. Traders on Sept. 10 exchanged 1,209 contracts on options that profit if company shares fall below $90 through the third week of September. Previously, 13 contracts had traded on an average day. Marsh & McLennan shares fell $2.50 today to $84.50.

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