Terrorists Were Playing The Markets. Does "Market Intelligence" Acquire A New Meaning?

09/18 05:35

U.S., Europe, Asia Agencies Probe Pre-Attack Trades (Update3)
By Judy Mathewson and Michael Nol

Washington, Sept. 18 (Bloomberg) -- Securities regulators in
the U.S., Europe and Asia say they are investigating whether
terrorists raised money through insider trading on knowledge of
attacks that destroyed New York's World Trade Center and closed
U.S. stock markets for four days.
Bloomberg data shows that trading in so-called put options,
which rise in value when stock prices fall, in airlines UAL Corp.
and AMR Corp. surged in the days before terrorists crashed
hijacked United and American jets into the center's twin towers
and the Pentagon.
Shares in 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 towers, also experienced pre-
attack option trading of 12 times to more than 25 times the usual
volume in put options, according to Bloomberg data.
``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.''
One day before two American Airlines jets were hijacked and crashed, 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 yesterday to $18.
`Terrorist Involvement'
Those 1,535 contracts were worth $1.6 million at yesterday'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 yesterday to $17.50. The 2,000 contracts were valued at
$2.4 million today, compared with $180,000 on Sept. 6.
Still, even if unusual movements are noted it might be hard
to prove links with terrorists. Unlike traditional mutual funds,
hedge funds are allowed to borrow securities and then sell them,
hoping to benefit from falling prices. They are also allowed to
borrow money to buy securities they expect will rise.
``Drawing any causality would be a long shot,'' said Alan
Thompson, senior vice president at risk consultant Stern Stewart
Pte. Ltd. in Singapore. ``Proving anything would be difficult.
Taking positions is what hedge funds do.''
Falling Already
Stocks of airlines, insurers and investment banks already had
been declining for months because of concerns about slowing
economies and falling stock markets around the world.
On Sept. 10, the day before the attacks, Morgan Stanley
shares were down 42 percent from Feb. 1, while Merrill Lynch lost
37 percent in that same period. AMR was down 25 percent from the
start of the year to below $30. UAL was down 22 percent.
Jean-Claude Trichet, governor of the Banque de France, said
today that investigations into trading must be carried out ``to
know what really happened, to be wary of rumors.''
``We're in a world where everything is possible and we must
believe the facts -- the proven acts,'' he said in an interview
with Europe 1 radio.
Trading records may help show whether Osama bin Laden or
other terrorists were behind high-volume 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.
Germany, France, Italy
``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.
France's stock market regulator, the Commission des
Operations de Bourse (COB), also is looking into trades of stocks
and other securities before Tuesday's attacks, spokeswoman Sabine
Bodin said.
`Special Attention'
``Circumstances call for giving special attention to
trades,'' she said. Axa SA, Europe's biggest insurer, asked for an
investigation, though COB decisions are independent. The company
has said claims from the attacks could cost up to $400 million.
A spokesman for Italy's regulator, Consob, said the agency is working with other stock market regulators to investigate trading patterns before the attacks. Spanish regulators also are
investigating, a spokesman for the CNMV regulator said.
Patrick Humphris, a spokesman for the U.K. Financial Services Authority, said the regulator is investigating stock trading
shortly before the attacks because ``We routinely look at share
trades either side of any major event to look for anything
suspicious.''
A spokeswoman for the Chicago Board Options Exchange declined comment.
Japan Investigation
Japan's Securities and Exchange Surveillance Commission is
probing futures trade in Tokyo and Osaka, SESC officials said. On
the Osaka Securities Exchange, 8,826 Nikkei-225 December futures
contracts changed hands on Sept. 10, compared with a daily average
of 1,151 contracts in the previous week, according to Bloomberg
data.
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.''
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 yesterday fell $6.40 to
$42.50. Merrill Lynch shares fell $5.37 to $41.48.
Surging Options
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
yesterday 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 on
Monday 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 yesterday to $84.50.

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