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Graphs bolster theory of market tampering

Updated: May 3, 2013 12:14PM

Originally published: October 8, 2001

One of the ugliest aspects of the terrorist attack is the increasingly likely possibility that those who financed the terrorists actually profited from the decline in the stock market.

The Chicago Board Options Exchange and the SEC confirmed they are participating in an investigation of the trading activity in stocks and options of companies whose businesses were affected by the attacks.

A conspiracy theory?

Typically I am not a believer in conspiracy theories, but some rather shocking graphics exist on the Web that lend credence to the theory that people who may have known about the terrorist attacks bought put options and made short sales that became profitable when the market opened on the Monday after the attack.

Respected stock market analyst Phil Erlanger, president of the Market Technicians Association, studied trading patterns in stocks including UAL (United Airlines), AMR (American Airlines), Marriott International, whose Vista Hotel was at the base of the World Trade Center, and Marsh & McLennan Cos. Inc., which had offices in floors 93-100 of one tower. At his Web site,, even the most casual observer will be stunned by the graphs that show an unusual rise in put volume and short sales and possibly some “naked call selling” in the weeks leading up to the terrorist event.

A person who believes a stock is going to decline might buy a put option--which gives him the right to “put” the shares back to the seller of the option at a fixed price within some months in the future. If the stock price declines, the put increases in value.

Similarly, short-selling involves a reversal of the usual process of buying low and selling high. A short-seller tells the brokerage firm that he does not own and cannot deliver the shares of stock he is selling, but he puts up margin money to buy the shares in the future. The seller hopes to lock in a profit by selling shares now at a high price and buying them back later at a lower price.

Investors who sell “naked calls” are granting others the right to buy stock from them if it increases in value in the future. But if the stock price declines, the call seller gets to keep all the proceeds from selling the call. It’s a risky strategy that you’d undertake only if you were very sure the stock would decline instead of rise.

Now take a look at the profits made by someone who bought put options on UAL. On Friday, Sept. 7, the UAL October 30 series of put options closed at $1.05. On Sept. 17, the day the market reopened, each of those puts was worth $12.39. Based on the outstanding number of options, those recent put-option buyers could have reaped a gain of nearly $2.5 million.

The most interesting aspect of these suspected manipulations is not in the money the terrorists made, but in the fact that these trades could not be closed out at a profit until the markets reopened on Monday--six full days after the terrorist attack. That gave the authorities plenty of time to track down those who had sold short or bought puts in the month before the attack.

In fact, a CBOE spokesperson confirmed it initiated an investigation as soon as staffers were allowed to go back into the exchange headquarters building on Sept. 11. They’re experts at this process, which is frequently used to see if insiders have profited from advance knowledge of mergers or other company announcements. Exchange officials say they can ascertain the identity of individual buyers and sellers of options the day after a transaction is made.

The money trail

Even if the manipulators took their profits amid the confusing market action when the market reopened on Sept. 17, the proceeds of their sales would not have been available to them until the next day. Surely, given this much time to investigate, the authorities would have been able to freeze those accounts and impound the suspected profits if they had chosen to do so.

We have heard no reports of any accounts being frozen. So the profits were likely wire-transferred from the brokerage accounts to international banks on Tuesday. And you can be sure the FBI was hot on the trail of the money, with a presidential order as a warning to those international banks that their own assets could be frozen in the United States if they don’t cooperate.

So, as horrible as the terrorist act itself, and as ironic as the greed that led the terrorists’ financiers to try to profit from the free enterprise system they were intent on destroying, our markets gave us the tools to track down the perpetrators. The money is the trail to follow. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s and Pennzoil-Quaker State Co.

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