Evidence of insider trading before September 11th

By: Paul Zarembka
Source: ITHP

This report addresses evidence of insider trading before September 11th, sometimes referred to by a broader phrase, informed trading. Insider trading refers to using private
knowledge of an anticipated event in order to profit financially by engaging in financial market transactions. In the first weeks after September 11, 2001 a number of financial publications called attention to substantial insider trading in put-options occurring before the attacks. Some of these early examples have been surveyed in Zarembka (2008, pp. 64-66, 69-71), while this book chapter also commented on certain exaggerations (e.g., an incorrect doubling of the put-option volumes). Quickly, commentary died out.

Purchasing a put option entitles the owner to sell a stock at a contractually stated price, the “strike price”, any time until the contract expires. If the market price of the stock goes down below the “strike price”, the owner of the put-option can buy the stock (if not already owned) and simultaneously sell the same stock at that “strike price”, making a profit if the cost of the option itself does not exceed the net revenue.

This report deals with evidence of insider trading only. It does not deal with speculations. Nor does it deal with certain open questions about financial issues surrounding September 11th that otherwise deserve investigations:

Large increases in the M1 money supply in the United States have been reported for July and August 2001 and explanations have been sought.
Huge financial transactions have been reported to have taken place at computers at the World Trade Center minutes before the attacks.
Selling short (borrowing a stock and selling it, then returning it later through purchasing).
Markets outside the United States.
Disappearances of gold and securities from the World Trade Center.
The specific financial firms directly hit by planes, and the financial investigations sabotaged by the WTC or Pentagon attacks.
Insurance payoffs, particularly to the owner of destroyed buildings, particularly to Larry Silverstein.

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