New Jump in ‘Short’ Sales May Muddy Terrorism Probe

Many travel-related and financial-services stocks that had been heavily “shorted” before the Sept. 11 terrorist attacks continued to be hammered by short sellers after the attacks, new data show.

The increase in short selling means those traders expect the stocks’ already-depressed prices to decline further.

The latest jump in short sales of certain stocks could complicate the government’s probe of possible insider trading by terrorists ahead of the attacks.

The Securities and Exchange Commission and other agencies are studying the trading activity of 38 stocks to determine whether terrorists sought to profit financially from their actions.

Part of their probe has focused on short sales. In a short sale, a trader borrows shares (usually from a brokerage) and sells them, hoping the price will fall. If it does, the investor can later buy replacement shares at lower prices and pocket the difference between the sale and repurchase prices.

Many airline and insurance shares experienced big increases in short sales before the attacks. That initial rise in activity had convinced some people that terrorists were involved in insider trading.

However, no evidence has emerged publicly to indicate that terrorists sought to manipulate the market before Sept. 11.

On Friday, the New York Stock Exchange said shorting activity in all NYSE stocks fell fractionally from Sept. 15 to Monday.

But among the 38 stocks being investigated by federal agencies, shorting activity rose in 24 stocks and fell in 11 others. (There were no data on three stocks that trade on other markets.)

The total number of shorted shares of UAL, parent of United Airlines, jumped to 6.83 million as of Monday from 4.39 million in mid-September. The total had zoomed from 3.1 million in the month before the attacks.

Heavy short selling in UAL and other stocks after the terrorist attacks could bolster the idea that the shorting ahead of the attacks was by legitimate traders who were simply taking their cue from a weakening economy, experts said.

“The airlines still could go out of business,” said David Tice, a well-known short seller in Dallas.

However, the new data is inconclusive. Some experts said that if terrorists shorted the stocks before the attacks, they may still be holding on to their positions for fear of drawing attention to themselves. That means shorting by legitimate traders after the attacks would cause the overall figures to rise.