Few Answers in Terrorist Insider Trading Investigation
Government investigators do not appear to be coming up with quick answers in their probe of possible insider trading by terrorists ahead of the Sept. 11 attacks.
Despite what seemed to some people to be a glaring case of market manipulation, no evidence has emerged publicly to indicate that those tied to the attacks tried to gain financially from them.
“To date, there are no flags or indicators” showing that terrorists used trading strategies known as “short selling” to profit from the attacks, Dennis Lormel, chief of the Federal Bureau of Investigation’s financial crimes unit, told a congressional committee on Oct. 3.
Some experts now say they doubt that such a scheme took place. What appears to be suspicious activity in some stocks may turn out to have been legitimate trading, they say.
What’s more, there is doubt that the terrorist organization that went to great lengths to plan and conceal the attacks would have risked leaving behind a paper trail that could expose its identity.
“It would be out of pattern [for them] to just lead us so easily to their tracks,” said Nikos Passas, a Temple University expert on international financial crimes. “If they [tried to manipulate the market] it would have been a strategic mistake on their part, and their track record so far shows they don’t make such mistakes.”
Nevertheless, the FBI, Securities and Exchange Commission and other agencies continue to search for evidence that terrorists may have sought to profit from the post-attacks plunge in the securities of airlines and other companies.
Regulators are examining whether terrorists shorted certain stocks or whether they bought “put” options, giving them the right to sell their holdings at a set price.
In a short sale, stock is borrowed from a brokerage and sold. The trader’s goal is to replace the borrowed shares at cheaper prices later. Thus, a short seller must make two transactions that should be traceable: first, the sale of stock; then the purchase of new shares to close out the trade.
U.S. and foreign investigators are focusing on trading in 38 stocks, according to a notice posted on the Web site of a Canadian securities industry trade group. Included are shares of airlines such as AMR Corp., parent of American, and UAL Corp., parent of United; insurers such as Marsh & McLennan Cos. and American International Group; and brokerages such as Morgan Stanley and Lehman Bros.
At first glance, the activity in some of those stocks just before Sept. 11 raised eyebrows. For example, the total number of shorted shares of UAL surged 40% between mid-August and mid-September, according to New York Stock Exchange data.
There also was extremely heavy buying of put contracts on Marsh & McLennan stock throughout the first half of August and again in early September, according to https://erlangersqueezeplay.com, a Web site tracking options activity.
To their advantage, regulators have conducted this sort of insider trading probe many times in the last two decades. Though the stakes are higher than ever before, the process is the same: It involves combing through a labyrinth of trading records in the United States and abroad--an exercise at which the SEC has become quite skilled, experts say.
Crucial to the investigation, they add, is the cooperation of other countries.
Regulators are adept at tracing financial activities within the United States, and can fairly easily obtain records from domestic brokerages, experts say. That process probably was completed in the initial days of the probe.
But if the financial trail leads overseas, the probe’s outcome could hinge on how successful U.S. regulators are at tracking down leads from abroad, several experts said.
The SEC has worked hard in the last decade to forge close ties with its regulatory counterparts in other countries. The agency has information-sharing pacts with more than two dozen countries in which foreign regulators have pledged their assistance in such investigations.
“There’s a lot of pressure in every sense of the word being brought to bear on any one of these jurisdictions to cough up the information and cooperate,” said William McLucas, a former SEC enforcement chief.
Nevertheless, tracking assets and transactions overseas can be a slow and painstaking process that is rife with obstacles. Chief among those is the likelihood that any illegal trading would have been done through shell accounts in which the identity of account-holders is purposely disguised.
In such cases, investigators must rely on foreign governments to reveal who controls the funds.
“The government’s ability to trace information abroad is largely--almost exclusively--dependent on the cooperation of the government of that country,” said Bill Lawler, a former Justice Department prosecutor who is a partner with Vinson & Elkins in Washington, D.C. “Once they get to a country that says, ‘No, we’re just not going to help you,’ that would be the dead-end.”
Some analysts aren’t convinced that the evidence is compelling enough to suggest that illegal trading occurred.
For example, open interest in AMR put options surged 73% on Sept. 10, a huge one-day jump, said Chris Johnson, an analyst at Schaeffer’s Investment Research, a Cincinnati research firm.
But that was only the fifth-largest one-day jump in AMR put options since 1990, Johnson said.
And the weakening economy was hurting airlines well before the attacks, analysts note. On Sept. 7, AMR warned that it would have disappointing second-half results.
“[The put-option activity was] significant, but at the same time it has happened in the past for reasons other than terrorist activities,” Johnson said. “You can’t rule out the fact that this was non-terrorist-related.”
However, questions linger. The number of put contracts that have yet to be closed out remains relatively high in AMR, Johnson said. Given that the plunge in AMR shares after the attacks made the puts very profitable, those contracts normally would be closed out as traders took their profits, Johnson said.
That could be a sign that trading in the put options was legitimate, and that investors are holding on to the securities in the hope that AMR’s stock price will fall further. But it also could signal that the accounts have been frozen or that the investors do not want to close out the trades for fear of drawing attention.
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‘Short Sales’ in Key Stocks
Investigators are probing sharp jumps in “short sales” of many financial and travel-related stocks ahead of the Sept. 11 terrorist attacks. A short sale is a bet on falling stock prices. But in some major stocks in those industries, short sales declined between mid-August and mid-September.
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Shorted shares outstanding Stock (millions) Pctg. change Stock 8/15 9/15 change 8/15-Wed. XL Capital 1.82 5.08 +179% +15% Boeing 6.95 9.51 +37 --38 AXA 0.70 0.89 +28 --32 AMR 2.48 2.98 +20 --42 Delta Air Lines 3.34 3.84 +15 --42 American Express 12.35 13.76 +11 --25 Royal Caribbean 8.92 9.77 +10 --61 Southwest Airlines 7.22 7.09 --2 --14 American Intl. Group 39.36 19.81 --50 +5
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Source: Bloomberg News
