Bleeding Edge: Put options, put-to-call ratios

[Kai Frederik Lorentzen]

HORST MEANTIME IS PUZZLED ABOUT something else. "Remember the week 
before this happened, all those put options on United and American 
Airlines? Which turned out to be exactly the two airlines that got 
hijacked? Well, it seems on that Thursday and Friday there were also 
lopsided put-to-call ratios for Morgan Stanley, Merrill Lynch, couple 
others like them, all tenants of the Trade Center. As a fraud 
investigator, what does that suggest to you?"
"Foreknowledge of a decline of their stock prices. Who was doing all 
this trading?"
"Nobody so far stepped forward."
"Mystery players who knew it was going to happen. Overseas maybe? Like 
the Emirates?
"I try to keep hold of my common sense, but ..." (pp. 323-324)

The other day I read an interesting article on the topic:

http://www.foreignpolicyjournal.com/2010/11/18/evidence-for-informed-trading-on-the-attacks-of-september-11/view-all/

" ... The Commission concluded that “exhaustive investigations” by the
SEC and the FBI “uncovered no evidence that anyone with advance
knowledge of the attacks profited through securities transactions.” What
they meant was that someone did profit through securities transactions
but, based on the Commission’s assumptions of guilt, those who profited
were not associated with those who were guilty of conducting the
attacks. In a footnote, the Commission report acknowledged “highly
suspicious trading on its face,” but said that this trading on United
Airlines was traced back to “A single U.S.-based institutional investor
with no conceivable ties to al Qaeda.”[1]

With respect to insider trading, or what is more technically called
informed trading, the Commission report was itself suspect for several
reasons. First, the informed trades relating to 9/11 covered far more
than just airline company stock. The stocks of financial and reinsurance
companies, as well as other financial vehicles, were identified as being
associated with suspicious trades. Huge credit card transactions,
completed just before the attacks, were also involved. The Commission
ultimately tried to frame all of this highly suspicious trading in terms
of a series of misunderstandings. However, the possibility that so many
leading financial experts were so completely wrong is doubtful at best
and, if true, would constitute another unbelievable scenario in the
already highly improbable sequence of events represented by the official
story of 9/11.

In the last few years, new evidence has come to light on these matters.
In 2006 and 2010, financial experts at a number of universities have
established new evidence, through statistical analyses, that informed
trades did occur with respect to the 9/11 attacks. Additionally, in
2007, the 911 Commission released a memorandum summary of the FBI
investigations on which its report was based.[2] A careful review of
this memorandum indicates that some of the people who were briefly
investigated by the FBI, and then acquitted without due diligence, had
links to al Qaeda and to US intelligence agencies. Although the elapsed
time between the informed trades and these new confirmations might
prevent legal action against the guilty, the facts of the matter can
help lead us to the truth about 9/11.

*Early signs*

Within a week of the attacks, Germany’s stock market regulator, BAWe,
began looking into claims of suspicious trading.[3] That same week,
Italy’s foreign minister, Antonio Martino, made it clear that he had
concerns by issuing this public statement: “I think that there are
terrorist states and organisations behind speculation on the
international markets.”[4]

Within two weeks of the attacks, CNN reported that regulators were
seeing “ever-clearer signs” that someone “manipulated financial markets
ahead of the terror attack in the hope of profiting from it.” Belgian
Finance Minister, Didier Reynders, said that there were strong
suspicions that British markets were used for transactions.[5] The CIA
was reported to have asked the British regulators to investigate some of
the trades.[6] Unfortunately, the British regulator, The Financial
Services Authority, wrote off its investigation by simply clearing “bin
Laden and his henchmen of insider trading.”[7]

Conversely, German central bank president, Ernst Welteke, said his bank
conducted a study that strongly indicated “terrorism insider trading”
associated with 9/11. He stated that his researchers had found “almost
irrefutable proof of insider trading.”[8] Welteke suggested that the
insider trading occurred not only in shares of companies affected by the
attacks, such as airlines and insurance companies, but also in gold and
oil. [9]

The extent of the 9/11-related informed trading was unprecedented. An
ABC News Consultant, Jonathan Winer, said, “it’s absolutely
unprecedented to see cases of insider trading covering the entire world
from Japan to the US to North America to Europe.”[10]

By October 2001, the Chicago Board Options Exchange (CBOE) and the four
other options exchanges in the US had joined forces with the FBI and the
Securities and Exchange Commission (SEC) to investigate a list of 38
stocks, as well as multiple options and Treasury bonds, that were
flagged in relation to potential informed trades. SEC Chairman Harvey
Pitt gave testimony to the House Financial Services Committee at the
time, saying, “We will do everything in our power to track those people
down and bring them to justice.”[11]

Mary Bender, chief regulatory officer at the CBOE, stated “We’ve never
really had anything like this, [the option exchanges are] using the same
investigative tools as we would in an insider-trading case. The point is
to find people who are connected to these heinous crimes.”

The people ultimately found included an unnamed customer of Deutsche
Bank Alex. Brown (DBAB). This involved a trade on United Airlines (UAL)
stock consisting of a 2,500-contract order that was, for some reason,
split into chunks of 500 contracts each and then directed to multiple
exchanges around the country simultaneously.[12] When the 9/11
Commission report pointed to a “single U.S.-based institutional investor
with no conceivable ties to al Qaeda,” it was referring to either DBAB
or its customer in that questionable trade.

Michael Ruppert has since written about DBAB, noting that the company
had previously been a financier of The Carlyle Group and also of Brown
Brothers Harriman, both of which are companies closely related to the
Bush family. Ruppert also noted that Alex. Brown, the company purchased
by Deutsche Bank to become DBAB, was managed by A.B. (Buzzy) Krongard,
who left the firm in 1998 to join the CIA as counsel to director George
Tenet.[13] Krongard had been a consultant to CIA director James Woolsey
in the mid 1990s and, on September 11^th , he was the Executive Director
of the CIA, the third highest position in the agency.

*Stock and Treasury bonds traded*

In 2002, investigator Kyle Hence wrote about the stocks involved in the
SEC’s target list. Those that had the highest examples of trade volume
over the average were UAL [285 times over average], Marsh & McLennan
(Marsh) [93 times over average], American Airlines (AMR) [60 times over
average], and Citigroup [45 times over average].[14] Other stocks
flagged included financial firms, defense-related companies, and the
reinsurance firms Munich Re, Swiss Re and the AXA Group. Put options for
these reinsurance firms, or bets that the stock would drop, were placed
at double the normal levels in the few days before the attacks.
Regulators were concerned about “large block trades” on these stocks
because the three firms were liable for billions in insurance payouts
due to the damage inflicted on 9/11.[15]

The four highest-volume suspect stocks — UAL, Marsh, AMR and Citigroup —
were closely linked to the attacks of 9/11. The two airline companies
each had two planes hijacked and destroyed. Marsh was located in the
exact 8 floors out of 110 in the north tower of the WTC where Flight 11
impacted and the fires occurred. Citigroup was the parent of Travelers
Insurance, which was expected to see $500 million in claims, and also
Salomon Smith Barney, which occupied all but ten floors in World Trade
Center (WTC) building 7. Oddly enough, Salomon Smith Barney had both
Donald Rumsfeld and Dick Cheney on its advisory board until January 2001.

Marsh occupied a number of floors in the south tower as well. This is
where the office of Marsh executive, L. Paul Bremer, was located. Bremer
was a former managing director at Kissinger Associates and had just
completed leading a national terrorism commission in 2000. The San
Francisco Chronicle noted that Bremer was a source of early claims that
rich Arabs were financing Osama bin Laden’s terrorist network. In an
article on the 9/11 informed trades, the Chronicle reported that “The
former chairman of the State Department’s National Commission on
Terrorism, L. Paul Bremer, said he obtained classified government
analyses early last year of bin Laden’s finances confirming the
assistance of affluent Middle Easterners.”[16]

On the day of 9/11, Bremer was interviewed by NBC News and stated that
he believed Osama bin Laden was responsible and that possibly Iraq and
Iran were involved too, and he called for the most severe military
response possible. For unknown reasons, Google removed the interview
video from its servers three times, and blocked it once.[17]

The trading of Treasury bonds just before 9/11 was also flagged as being
suspicious. Reporters from The Wall street Journal wrote that the “U.S.
Secret Service contacted a number of bond traders regarding large
purchases of five-year Treasury notes before the attacks, according to
people familiar with the probe. The investigators, acting on a tip from
traders, are examining whether terrorists, or people affiliated with
terrorist organizations, bought five-year notes, including a single $5
billion trade.”[18]

Some reports claimed that the 9/11 informed trades were such that
millions of dollars were made, and some of that went unclaimed. [19]
Others suggested that the trades resulted in the winning of billions of
dollars in profits. One such suggestion was made by the former German
Minister of Technology, Andreas von Buelow, who said that the value of
the informed trades was on the order of $15 billion.[20]

*The FBI Investigations*

In May 2007, a 9/11 Commission document that summarized the FBI
investigations into potential 9/11-related informed trading was
declassified. [21] This document was redacted to remove the names of two
FBI agents from the New York office, and to remove the names of select
suspects in the informed trading investigations. The names of other FBI
agents and suspects were left in. Regardless, some information can be
gleaned from the document to help reveal the trades and traders
investigated.

On September 21, 2001, the SEC referred two specific transactions to the
FBI for criminal investigation as potential informed trades. One of
those trades was a September 6, 2001 purchase of 56,000 shares of a
company called Stratesec, which in the few years before 9/11 was a
security contractor for several of the facilities that were compromised
on 9/11. These facilities included the WTC buildings, Dulles airport,
where American Airlines Flight 77 took off, and also United Airlines,
which owned two of the other three ill-fated planes.

The affected 56,000 shares of Stratesec stock were purchased by a
director of the company, Wirt D. Walker III, and his wife Sally Walker.
This is clear from the memorandum generated to record the FBI summary of
the trades investigated.[22] The Stratesec stock that the Walkers
purchased doubled in value in the one trading day between September 11th
and when the stock market reopened on September 17th. The Commission
memorandum suggests that the trade generated a profit of $50,000 for the
Walkers. Unfortunately, the FBI did not interview either of the Walkers
and they were both cleared of any wrongdoing because they were said to
have “no ties to terrorism or other negative information.” [23]

However, Wirt Walker was connected to people who had connections to al
Qaeda. For example, Stratesec director James Abrahamson was the business
partner of Mansoor Ijaz, who claimed on several occasions to be able to
contact Osama bin Laden.[24] Additionally, Walker hired a number of
Stratesec employees away from a subsidiary of The Carlyle Group called
BDM International, which ran secret (black) projects for government
agencies. The Carlyle Group was partly financed by members of the bin
Laden family.[25] Mr. Walker ran a number of suspicious companies that
went bankrupt, including Stratesec, some of which were underwritten by a
company run by a first cousin of former CIA director (and President)
George H.W. Bush. Additionally, Walker was the child of a CIA employee
and his first job was at an investment firm run by former US
intelligence guru, James “Russ” Forgan, where he worked with another
former CIA director, William Casey.[26] Of course, Osama bin Laden had
links to the CIA as well.[27]

Another trade investigated by the FBI, on request from the SEC, focused
on Amir Ibrahim Elgindy, an Egyptian-born, San Diego stock advisor who
on the day before 9/11 had allegedly attempted to liquidate $300,000 in
assets through his broker at Salomon Smith Barney. During the attempted
liquidation, Elgindy was said to have “predicted that the Dow Jones
industrial average, which at the time stood at about 9,600, would soon
crash to below 3,000.”[28]

The 9/11 Commission memorandum suggests that the FBI never interviewed
Mr. Elgindy either, and had planned to exonerate him because there was
“no evidence he was seeking to establish a position whereby he would
profit from the terrorist attacks.” Apparently, the prediction of a
precipitous drop in the stock market, centered on the events of 9/11,
was not sufficient cause for the FBI to interview the suspect.

In late May 2002, Elgindy was arrested along with four others, including
an FBI agent and a former FBI agent, and charged with conspiracy to
manipulate stock prices and extort money from companies. The FBI agents,
Jeffrey A Royer and Lynn Wingate, were said to have “used their access
to F.B.I. databases to monitor the progress of the criminal
investigation against Mr. Elgindy.”[29] A federal prosecutor later
accused Elgindy, who also went by several aliases, of having prior
knowledge of the 9/11 attacks. Although the judge in that case did not
agree with the prosecutor on the 9/11 informed trading accusation, Mr.
Elgindy was eventually convicted, in 2005, of multiple crimes including
racketeering, securities fraud, and making false statements.

The Boston office of the FBI investigated stock trades related to two
companies. The first was Viisage Technologies, a facial recognition
company that stood to benefit from an increase in terrorism legislation.
The Viisage purchase, made by a former employee of the Saudi American
Bank, “revealed no connection with 9/11.” However, the Saudi American
Bank was named in a lawsuit brought by the 9/11 victims’ families due to
the bank having — “financed development projects in Sudan benefiting bin
Laden in the early 1990s.”[30]

The second company investigated by the Boston FBI office was Wellington
Management, a company that allegedly held a large account for Osama bin
Laden. The FBI found that Wellington Management maintained an account
for “members of the bin Laden family” but dropped the investigation
because it could not link this to “Osama, al Qaeda, or terrorism.”[31]

Although the connections to al Qaeda in three of these cases (Walker,
the Viisage trader, and Wellington Management) can be seen as
circumstantial, the amount of such evidence is considerable. The quality
of the FBI investigations, considering the suspects were not even
interviewed, was therefore much less than “exhaustive”, as the 9/11
Commission characterized it.

The summary of FBI investigations released by the 9/11 Commission also
described how the Commission questioned the FBI about damaged computer
hard drives that might have been recovered from the WTC. This
questioning was the result of “press reports [contending] that large
volumes of suspicious transactions flowed through the computers housed
in the WTC on the morning of 9/11 as part of some illicit but
ill-defined effort to profit from the attacks.”[32] The Commission came
to the conclusion that no such activity occurred because “the assembled
agents expressed no knowledge of the reported hard-drive recovery
effort” and “everything at the WTC was pulverized to near powder, making
it extremely unlikely that any hard-drives survived.”

The truth, however, is that many such hard-drives were recovered from
the WTC and were sent to specialist companies to be cleaned and have
data recovered. A German company named Convar did a good deal of the
recovery work.

In December 2001, Reuters reported that “Convar has recovered
information from 32 computers that support assumptions of dirty doomsday
dealings.” Richard Wagner, a data retrieval expert at Convar, testified
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. They thought that the records of their
transactions could not be traced after the main frames were destroyed.”
Director of Convar, Peter Henschel, said that it was “not only the
volume, but the size of the transactions [that] was far higher than
usual for a day like that.”[33]

By late December 2001, Convar had completed processing 39 out of 81
drives, and expected to receive 20 more WTC hard drives the next month.
Obviously, the 911 Commission memorandum drafted in August 2003 was not
particularly reliable considering it reported that the FBI and the 911
Commission had no knowledge of any of this.

*Statistical confirmations*

Considering that the FBI and 9/11 Commission overlooked the suspicious
connections of informed trading suspects like Wirt Walker, and also
claimed in 2003 to have no knowledge of hard drive recoveries publicly
reported in 2001, we must assume that they did a poor job of
investigating. Today, however, we know that several peer-reviewed
academic papers have reported solid evidence that informed trades did
occur. That is, the conclusions reached by the official investigations
have now been shown, through scientific analysis, to be quite wrong.

In 2006, a professor of Finance from the University of Illinois named
Allen Poteshman published an analysis of the airline stock option trades
preceding the attacks. This study came to the conclusion that an
indicator of long put volume was “unusually high which is consistent
with informed investors having traded in the option market in advance of
the attacks.”[34] Long puts are bets that a stock or option will fall in
price.

The unusually high volume of long puts, purchased on UAL and AMR stock
before these stocks declined dramatically due to the 9/11 attacks, are
evidence that the traders knew that the stocks would decline. Using
statistical techniques to evaluate conditional and unconditional
distributions of historical stock option activity, Professor Poteshman
showed that the data indicate that informed trading did occur.

In January 2010, a team of financial experts from Switzerland published
evidence for at least thirteen informed trades in which the investors
appeared to have had foreknowledge of the attacks. This study focused
again on a limited number of companies but, of those, the informed
trades centered on five airline companies and four financial companies.
The airline companies were American Airlines, United Airlines and
Boeing. Three of the financial companies involved were located in the
WTC towers and the fourth was Citigroup, which stood to lose doubly as
the parent of both Travelers Insurance and the WTC 7 tenant, Salomon
Smith Barney.[35]

More recently, in April 2010, an international team of experts examined
trading activities of options on the Standard & Poors 500 index, as well
as a volatility index of the CBOE called VIX. These researchers showed
that there was a significant abnormal increase in trading volume in the
option market just before the 9/11 attacks, and they demonstrated that
this was in contrast to the absence of abnormal trading volume over
periods long before the attacks. The study also showed that the relevant
abnormal increase in trading volume was not simply due to a declining
market.[36] Their findings were “consistent with insiders anticipating
the 9-11 attacks ... ”



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