Staff Report to the Commission

volume by more than 20 times—highly suspicious numbers on their face.170 The SEC

quickly discovered, however, that a single U.S. investment adviser had purchased 95

percent of the UAL put option volume for the day. The investment adviser certainly did

not fit the profile of an al Qaeda operative: it was based in the United States, registered

with the SEC, and managed several hedge funds with $5.3 billion under management. In

interviews by the SEC, both the CEO of the adviser and the trader who executed the trade

explained that they—and not any client—made the decision to buy the put as part of a

trading strategy based on a bearish view of the airline industry. They held bearish views

for a number of reasons, including recently released on-time departure figures, which

suggested the airlines were carrying fewer passengers, and recently disclosed news by

AMR reflecting poor business fundamentals. In pursuit of this strategy, the adviser sold

short a number of airline shares between September 6 and September 10; its transactions

included the fortunate purchase of UAL puts. The adviser, however, also bought 115,000

shares of AMR on September 10, believing that their price already reflected the recently

released financial information and would not fall any further. Those shares dropped

significantly when the markets reopened after the attacks. Looking at the totality of the

adviser’s circumstances, as opposed to just the purchase of the puts, convinced the SEC

that it had absolutely nothing to do with the attacks or al Qaeda. Still, the SEC referred

169 See, e.g., September 18, 2001 Associated Press Report.

170 A high ratio of puts to calls means that on that day far more money was being bet that the stock price

would fall than that the stock price would rise. Such a ratio is a potential indicator of insider trading—

although it can also prove to have entirely innocuous explanations, as in this case.

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149

the trade to the FBI, which also conducted its own investigation and reached the same

conclusion.

The AMR put trading on September 10 further reveals how trading that looks highly

suspicious at first blush can prove innocuous. The put volume of AMR on September 10

was unusually high and actually exceeded the call volume by a ratio of 6:1—again,

highly suspicious on its face. The SEC traced much of the surge in volume to a California

investment advice newsletter, distributed by email and fax on Sunday, September 9,

which advised its subscribers to purchase a particular type of AMR put options. The SEC

interviewed 28 individuals who purchased these types of AMR puts on September 10,

and found that 26 of them cited the newsletter as the reason for their transaction. Another

27 purchasers were listed as subscribers of the newsletter. The SEC interviewed the

author of the newsletter, a U.S. citizen, who explained his investment strategy analysis,

which had nothing to do with foreknowledge of 9/11. Other put option volume on

September 10 was traced to similarly innocuous trades.

Another good example concerns a suspicious UAL put trade on September 7, 2001. A

single trader bought more than one-third of the total puts purchased that day, establishing

a position that proved very profitable after 9/11. Moreover, it turns out that the same

trader had a short position in UAL calls—another strategy that would pay off if the price

of UAL dropped. Investigation, however, identified the purchaser as a well-established

New York hedge fund with $2 billion under management. Setting aside the unlikelihood

of al Qaeda having a relationship with a major New York hedge fund, these trades looked

facially suspicious. But further examination showed the fund also owned 29,000 shares of

UAL stock at the time—all part of a complex, computer-driven trading strategy. As a

result of these transactions, the fund actually lost $85,000 in value when the market

reopened. Had the hedge fund wanted to profit from the attacks, it would not have

retained the UAL shares.

These examples were typical. The SEC and the FBI investigated all of the put option

purchases in UAL and AMR, drawing on multiple and redundant sources of information

to ensure complete coverage. All profitable option trading was investigated and resolved.

There was no evidence of illicit trading and no unexplained or mysterious trading.

Moreover, there was no evidence that profits from any profitable options trading went

uncollected.171

The options trading in UAL and AMR was typical of the entire investigation. In all

sectors and companies whose trades looked suspicious because of their timing and

171 The press has reported this claim, and the allegation even found its way into the congressional testimony

concerning terrorist financing of a former government official. The government investigation would have

detected such traders because the investigators focused on people who purchased profitable positions—

regardless of when or whether or when they closed out the position. Moreover, officials at the SEC and the

Options Clearing Corporation, a private entity that processes options trading, pointed out that any profitable

options positions are automatically exercised upon the expiration date unless the customer explicitly

directed otherwise. Any direction not to exercise profitable options is a highly unusual event, which the

OCC double-checks by contacting the broker who gave them such instruction. The OCC personnel had no

recollection of any such contacts after 9/11.

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profitability, including short selling of UAL, AMR, and other airline stocks, close

scrutiny revealed absolutely no evidence of foreknowledge. The pattern is repeated over

and over. For example, the FBI investigated a trader who bought a substantial position in

put options in AIG Insurance Co. shortly before 9/11. Viewed in isolation, the trade

looked highly suspicious, especially when AIG stock plummeted after 9/11. The FBI

found that the trade had been made by a fund manager to hedge a long position of 4.2

million shares in the AIG common stock. The fund manager owned a significant amount

of AIG stock, but the fund had a very low tax basis in the stock (that is, it had been

bought long ago and had appreciated significantly over time). Selling even some of it

would have created a massive tax liability. Thus, the fund manager chose to hedge his

position through a put option purchase. After 9/11, the fund profited substantially from its

investment in puts. At the same time, however, it suffered a substantial loss on the

common stock, and overall lost money as a result of the attacks.

In sum, the investigation found absolutely no evidence that any trading occurred with

foreknowledge of 9/11. The transparency of the U.S. securities markets almost ensures

that any such trading would be detectable by investigators. Even if the use of some

combination of offshore accounts, shell companies, and false identification obscured the

identity of the traders themselves, the unexplained trade would stand out like a giant red

flag. The absence of any such flags corroborates the conclusion that there is no evidence

any such trading occurred. Indeed, the leaders of both the SEC and FBI investigations

into pre-9/11 trading expressed great confidence in this conclusion.

International Investigation

There is also no evidence that any illicit trading occurred overseas. Through its Office of

International Affairs, the SEC sought the assistance of numerous foreign countries with

active securities markets. The FBI also engaged with foreign law enforcement officials

about overseas trading. There are two issues to consider with respect to the international

investigation: overseas trading in U.S. securities and trading of foreign securities in

overseas markets.

Trading of U.S. securities overseas

The SEC sought the assistance of countries where there was significant trading of U.S.

securities. Each of these countries had previously entered into information sharing

agreements with the SEC to cooperate in securities investigations, and each willingly

cooperated in the 9/11 investigation. According to the SEC, there is generally little

trading of U.S. securities overseas, since U.S. securities trade primarily in U.S. markets.

Thus, unusual trading in U.S. securities would not have been very hard for foreign

regulators to detect. Each country the SEC contacted conducted an investigation and

reported back to the SEC that there was no trading in U.S. securities in their jurisdiction

that appeared to have been influenced by foreknowledge of the 9/11 attacks.

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151

The foreign investigators also helped investigate suspicious trading in the U.S. from

offshore accounts. For example, the SEC investigation revealed that shortly before 9/11

an offshore account had taken a short position in a fund that tracked one of the major

U.S. market indices—an investment that profited when the U.S. market declined. After

9/11, the offshore investor closed out the position, reaping $5 million in profit. The

SEC’s Office of International Affairs solicited help from a European country to

investigate further. Although this trade was highly suspicious on its face, the European

country’s investigation revealed that this investor was an extremely wealthy European

national who often speculated by taking short positions in the U.S. market. In fact, the

same investor had employed this strategy to lose $8 million in the six months preceding

9/11.

Trading of foreign securities

There is also no evidence that insider trading took place in the stock of any foreign

company. The SEC asked its foreign counterparts to investigate trading in securities that

trade primarily on foreign markets subject to foreign regulation. Indeed, a number of

companies that suffered serious economic losses from the 9/11 attacks were foreign

companies, which traded mainly on foreign markets. In particular, the insurance

companies with the largest potential losses included Munich Reinsurance Co., Swiss

Reinsurance Co., and Allianz AG, all foreign-based companies that primarily traded

overseas.172 In addition to the SEC, the FBI team investigating the financial aspects of the

9/11 plot frequently dealt with foreign law enforcement officials after 9/11 and raised the

trading issue.173 Neither the SEC nor the FBI was informed of any evidence of any illicit

trading in advance of 9/11 in any foreign securities.

Shortly after 9/11, Ernst Welteke, president of the German Central Bank, made a number

of public statements that insider trading occurred in airline and insurance company stock,

and also in gold and oil futures. These preliminary claims were never confirmed. In fact,

German officials publicly backtracked fairly soon after Mr. Welteke’s statement was

issued. On September 27, a spokesman for the German securities regulator, BAWe

(Bundesaufsichtsamt für den Wertpapierhandel), declared that while the investigation

was continuing, “there is no evidence that anyone who had knowledge of the attacks

before they were committed used it to make financial transactions.”174 On December 3,

2001, a spokesman for the BAWe said its investigation had revealed no evidence of illicit

172 According to the SEC’s Chief, Market Surveillance, the countries with the most significant relevant

trading of foreign corporations stock were the UK and Germany. The UK quickly and publicly reported it

had found no illicit trading. See e.g., J. Moore, The Times, Bin Ladin did not Deal (October 17, 2001)

(Chairman of Financial Services Authority reported that investigation failed to reveal evidence of irregular

share dealings in London in advance of 9/11). Other countries publicly reported similar findings. See e.g.,

Associated Press Worldstream, Suspicion dispelled of insider trading in KLM shares before September 11

attacks (reporting conclusion of Dutch government investigation that sharp drop in share prices of the

national airline days before 9/11 were not caused by people who knew of terrorist attacks).

173 The chief of the FBI team also raised the issue with CIA and asked it to be alert for any intelligence on

illicit trading; he received no such reports from the CIA.

174 Agence France Presse (Sept. 27, 2001).

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trading in advance of 9/11 and that the case remained open pending new information. The

spokesman said separate investigations by state authorities had also yielded no

information and had been closed. 175

Commission staff interviewed German law enforcement officials who said that

exhaustive investigation in Germany revealed no evidence of illicit trading. Moreover,

both SEC and FBI officials involved in the trading investigation told the Commission

staff that German investigators had privately communicated to them that there was no

evidence of illicit trading in Germany before 9/11. The FBI legal attaché in Berlin

forwarded a lead to the German BKA (Bundeskriminalamt), which reported back that the

trading allegations lacked merit. It appears, then, that Welteke’s initial comments were

simply ill-considered and unsupported by the evidence.176

Other investigation corroborates the conclusion of no illicit

trading

Since 9/11, the U.S. government has developed extensive evidence about al Qaeda and

the 9/11 attacks. The collected information includes voluminous documents and

computers seized in raids in Afghanistan and throughout the world. Moreover, the United

States and its allies have captured and interrogated hundreds of al Qaeda operatives and

supporters, including the mastermind of the 9/11 plot and the three key plot facilitators.

No information has been uncovered indicating that al Qaeda profited by trading securities

in advance of 9/11. To the contrary, the evidence—including extensive materials

reviewed by Commission staff—all leads to the conclusion that knowledge of the plot

was closely held by the top al Qaeda leadership and the key planners. It strains credulity

to believe that al Qaeda would have jeopardized its most important and secretive

operation or any of its key personnel by trying to profit from securities speculation.

175 See Australian Financial Review (Dec 3, 2001).

176 The SEC investigated trading of American Depository Receipts (ADRs) in foreign companies. ADRs

are receipts issued by a U.S. bank for the shares of a foreign corporation held by the bank. ADRs publicly

trade on U.S. markets. This investigation revealed no illicit trading.