Connecting the Dots: The 9/11 Commission’s ‘Failure of Imagination’

Insider Trading

There…have been claims that al Qaeda financed itself through manipulation of the stock market based on its advance knowledge of the 9/11 attacks. Exhaustive investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions.[1]

That’s not all the 9/11 Commission’s final report has to say about allegations of insider trading prior to the terrorist attacks on the World Trade Center and Pentagon. There’s a footnote. It is quite lengthy, for a footnote. Still, one might imagine that any serious investigation into the mysterious trading might have ventured to offer a more sufficient explanation. If you don’t know what I’m talking about, it might be worthwhile to review the non-existent evidence that doesn’t indicate advance knowledge. Seven days after the attacks, Bloomberg Financial News reported the following:

Trading skyrocketed in options that bet on a drop in UAL [United Airlines] Corp. and AMR [American Airlines] 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.[2]

The increased trades were in “put” options, which, the report explained, “profit when a company’s shares fall.” There were also reports of “short selling”, where stock is sold in the hopes that it can be bought back at a cheaper price after the price drops. In either case, the trader is betting that a stock will decline in value. Trades are monitored constantly for signs of insider trading.[3] One automated system, for example, called the CBOE Market Surveillance System records information on trades and is designed to identify inside traders.[4] Suspicions about the pre-9/11 trades led to investigations being launched in countries on three continents, including in the U.S., Japan, Germany, the U.K., France, Luxembourg, Hong Kong, Switzerland, and Spain.[5]

CBS News reported that “the afternoon before the attack, alarm bells were sounding over unusual trading in the U.S. stock options market”, involving at least 450,000 shares of American Airlines, of which more than 80 percent were put options. “Sources say they have never seen that kind of imbalance before,” the report continued, estimating a $5 million profit for those who made the trades. The Securities and Exchange Commission (SEC) was notified of the suspicious activity shortly after the attacks. “The same thing happened,” the report noted, “with United Airlines on the Chicago Board Options Exchange four days before the attack.” [6] On the Friday before the attacks, United options experienced eight times the normal level of trading in put options on the Chicago Exchange.[7]

The International Policy Institute for Counter-Terrorism (ICT), an Israeli think-tank headed by former intelligence officials, published a report entitled “Black Tuesday: The World’s Largest Insider Trading Scam”, which listed a number of indications “that some trades were almost certainly made based upon advance knowledge of the Black Tuesday attacks”. The evidence included the following:

• Between September 6 and 7, the Chicago Board Options Exchange saw purchases of 4,744 put options on United Airlines, but only 396 call options.  Although there was no news at that time to justify so much "left-handed" trading, United Airlines stock fell 42 percent, from $30.82 per share to $17.50, when the market reopened after the attacks.  Assuming that 4,000 of the options were bought by people with advance knowledge of the imminent attacks, these "insiders" would have profited by almost $5 million.
• On September 10, 4,516 put options on American Airlines were bought on the Chicago exchange, compared to only 748 calls.  Again, there was no news at that point to justify this imbalance; but American Airlines stock fell 39 percent, from $29.70 to $18.00 per share, when the market reopened.  Again, assuming that 4,000 of these options trades represent "insiders," they would represent a gain of about $4 million.
• No similar trading in other airlines occurred on the Chicago exchange in the days immediately preceding Black Tuesday.
• Morgan Stanley Dean Witter & Co., which occupied 22 floors of the World Trade Center, saw 2,157 of its October $45.00 put options bought in the three trading days before Black Tuesday; this compares to an average of 27 contracts per day before September 6.  Morgan Stanley's share price fell from $48.90 to $42.50 in the aftermath of the attacks.  Assuming that 2,000 of these options contracts were bought based upon knowledge of the approaching attacks, their purchasers could have profited by at least $1.2 million.
• Merrill Lynch & Co., with headquarters near the Twin Towers, saw 12,215 October $45.00 put options bought in the four trading days before the attacks; the previous average volume in these options had been 252 contracts per day.  When trading resumed, Merrill's shares fell from $46.88 to $41.50; assuming that 11,000 option contracts were bought by "insiders," their profit would have been about $5.5 million.[8]

Just as importantly, it is possible to trace such trades. “We can directly work backwards from a trade on the floor of the Chicago Board Options Exchange,” Randall Dodd of the Economic Strategy Institute told CBS News. “The trader is linked to a brokerage firm. The brokerage firm received the order to buy that ‘put’ option from either someone within a brokerage firm speculating, or from one of the customers.”[9]

President of the German Deutsche Bundesbank, Ernst Welteke, told reporters that probes into the trading showed “that activities on international financial markets must have been planned and executed with the necessary knowledge.” German authorities were cooperating with the Federal Bureau of Investigation (FBI), Welteke added, but declined to identify which companies were being focused on by the German investigation. It was believed to have focused on Munich Re, the world’s biggest reinsurer, which saw double the normal volume of trading in the week before the attacks.[10]

“What we found,” Welteke said, “makes us sure that people connected to the terrorists must have been trying to profit from this tragedy”. He added that, besides the short-selling of airline and insurance stocks, there was an “inexplicable” rise in oil prices that oil contracts were bought and then re-sold for a much higher price, as well as suspicious movements in gold markets.[11]

Despite this, The New York Times reported on September 28 that “After almost two weeks of investigation, financial regulators around the world have found no hard evidence that people with advance knowledge of the terrorist attacks in New York and Washington used that information to profit in the international securities markets.” The report’s explanation for the irregularities was that “concerns about the airline industry had been growing for some time” and that “industry experts were predicting ‘a further deterioration’ in the airline industry’s financial performance.”[12] The report failed, however, to explain why, then, no other airlines experienced similar trading patterns. After all, the concerns were industry-wide and not specific to only American and United. Furthermore, from this explanation, one would expect a pattern of such trades to occur over time, not in a sudden sharp spike followed by a return to normalcy. The explanation was, simply put, insufficient to explain the irregularity.

The story was far from dead, and more questions continued to develop. The San Francisco Chronicle reported the following day that more than $2.5 million in profits made in trading on United options had not been collected by those responsible. “The uncollected money,” the Chronicle reported, “raises suspicions that the investors – whose identities and nationalities have not been made public – had advance knowledge of the strikes.” One explanation was that those responsible for the trades assumed they could collect the money without detection, but “now fear exposure, or that the account has been frozen” because “markets were closed for four days after the attack, giving investigators time to notice the anomalous trades.” The Chronicle also noted that an SEC spokesman “declined to comment on a New York Times report yesterday that the SEC had found ‘benign’ explanations for the trading activity”, but reiterated that they were “pursuing all credible leads.” Another significant lead reported by the Chronicle was that “Deutsche Banc Alex. Brown, the American investment banking arm of the German giant Deutsche Bank” was “the investment bank used to purchase at least some of the options.[13]

The SEC, in the course of its investigation, asked investment firms in the U.S. and Canada to review their records for evidence of unusual trading patterns, listing 38 companies affected by the 9/11 attacks, including tenants of the World Trace Center.[14] The Wall Street Journal reported that the SEC investigation was being joined by a Secret Service probe into unusual purchases of U.S. Treasury notes, including one $5 billion trade.[15]

More than a month after the attacks, Britain’s The Independent reported that $2.5 million in profits still remained unclaimed and that, “To the embarrassment of investigators, it has also emerged that the firm used to buy many of the ‘put’ options – where a trader, in effect, bets on a share price fall – on United Airlines stock was headed until 1998 by ‘Buzzy’ Krongard, now executive director of the CIA. Until 1997, Mr Krongard was chairman of Alex Brown Inc, America’s oldest investment banking firm. Alex Brown was acquired by Bankers Trust, which in turn was bought by Deutsche Bank.”[16]

In May, 2002, the FBI had raided the house of Amr Ibrahim Elgindy, who was held on charges of racketeering, extortion, and obstruction of justice. The prosecutor in the case suggested that he may “perhaps” have had “pre-knowledge of the Sept. 11 attacks”, since he had predicted a drop in the market and liquidated his children’s trust account. The judge disregarded the insinuation.[17] Perhaps of more significance, the New York Post reported that, according to the indictment, Elgindy had allegedly led a ring of inside-traders that included two FBI agents who “used confidential databases to give Elgindy inside information about publicly traded companies.”[18] Newsday reported that “classified information had been found during a search of possessions of a former FBI agent allegedly part of an insider trading conspiracy.”[19] While the entire episode may have had nothing to do with the attacks, it might perhaps be noteworthy that FBI agents were implicated in conspiracy involving insider trading.

In 2003, a Reuters report noted that German computer experts were “working round the clock to unlock the truth behind an unexplained surge in financial transactions made just before two hijacked planes crashed into New York’s World Trade Center on September 11.” The German firm Convar was working to recover records from computer hard drives found in the rubble of the WTC. The director of the company noted the possibility that “Americans went on an absolute shopping binge” that morning, but added, “Not only the volume but the size of the transactions was far higher than usual for a day like that. There is a suspicion that these were possibly planned to take advantage of the chaos.” A data retrieval expert at the company said that more than $100 million in illegal transfers might have been made and that “There is a suspicion that some people had advance knowledge of the approximate time of the plane crashes in order to move out amounts exceeding $100 million.” If so, he explained, “They thought that the records of their transactions could not be traced after the main frames were destroyed.”[20]

Two years after the attacks, the FBI announced that it had closed its investigation, which had turned up “absolutely no evidence” that anyone had inside knowledge that such an atrocity would occur.[21]

Returning to the 9/11 Commission, the footnote reads:

Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact occur, but each trade proved to have an innocuous explanation. For example, the volume of put options – investments that pay off only when a stock drops in price – surged in the parent companies of United Airlines on September 6 and American Airlines on September 10 – highly suspicious trading on its face. Yet, further investigation has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10. Similarly, much of the seemingly suspicious trading in American on September 10 was traced to a specific U.S.-based options trading newsletter, faxed to its subscribers on Sunday, September 9, which recommended these trades. These examples typify the evidence examined by the investigation. The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous resources to investigating this issue, including securing the cooperation of many foreign governments. These investigators have found that the apparently suspicious consistently proved innocuous.[22]

The “institutional investor” who purchased “95 percent of the UAL puts on September 6”, we are told, has “no conceivable ties to al Qaeda”. But the question is not whether the traders had ties to al Qaeda, but whether they conceivably had knowledge of the impending attacks, the latter of which does not necessarily predicate itself upon the former. This may be indicative of the investigation itself. Undoubtedly, investigators were expecting the trail of evidence to lead in a particular direction. When the trail led them in a different direction than their preconceived notion thought it would, it was easy to conclude that it was a dead end. If the investigators employed a similar logic as the Commission, then rather than rigorously pursuing evidence of insider knowledge of an impending attack no matter where it led, the investigators assumed that if there was insider trading, it was from al Qaeda members. If the trail led them to people who were not al Qaeda members, then they couldn’t have had foreknowledge, according to this logic, which, needless to say, is fallacious.

In short, highly suspicious trades set off investigations in numerous countries across the globe. The investigations, we are told, found no evidence that members of al Qaeda were responsible for the trades. The trail of the investigation, as it turned out, simply did not lead to where it was supposed to, and so was terminated. It’s entirely possible that it was all just a coincidence. It’s also entirely possible that we have not been told the whole truth of what was learned through the investigation. There is another prominent example of precisely that.