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  • Writer's pictureJoseph Grmovsek, LLB (White Collar Crime Prevention Speaker)

9/11 and Inside Trading: An Inside Trader’s Insights

Beyond being asked how to make money inside trading, I am most often questioned about the terrorist attack on 9/11 and whether inside trading and the millions some made from it signaled that tragic event beforehand.

Yes, is my short answer; and, not because I am some conspiracy theorist. Below is my long answer and a written record, as I remember it, of a conversation I had with my first cellmate in the Millhaven Maximum Security Institute on that very same subject and the reasons for my belief that 9/11 and insider trading were connected (some of which, I'd wager, even conspiracy theorists have never before considered).


"So," George said in tune with a slap of his hands on his thighs as if to signal that he was ready for something else, "Your turn: Tell me how to become an inside trader and get rich?"

"How to become one," I began slowly, "is probably not something that you should look to do considering that the title only gets applied after you're caught and convicted."

"I was called the "best" and "most prolific" inside trader in history because I admitted to committing north of a hundred separate trades over a period of fifteen years -- before finally getting arrested, of course. All that those titles earned me in the end was a sentence that mandated that I, a white-collar, minimum security prisoner, begin my assessment in a hard-core, maximum security prison ... with you," I added with a voice trailing off and quieted by regret and my position facing the wall to the side of my bed. "Telling you how to invest -- to find an edge -- and to make money legally and get rich using information, inside or otherwise, is probably a better road for us to take; but, that's something for later. If I can, let's start with an incident that you probably know about."

“Go,” George demanded.

"The attacks of September 11, 2001 are probably the most famous example of insider trading and no one has ever gone to prison for it either," I said directly, wanting to get his attention.

"9/11? Come on? Seriously? How could someone that knew about 9/11 beforehand make money? Didn't the price of everything in the stock market get slaughtered right afterwards?" he asked.

"How could someone? How DID someone is probably more like it," I corrected in a way that belayed my commitment to discretion in prison. "Nothing has been proven, so I understand how this might sound like the ramblings of a conspiracy theorist or nut; but, speaking as someone who knows how a person with inside information would operate in such a situation, I believe that tens of millions of dollars were made by those with prior knowledge of the attacks on America and, as you said so descriptively and accurately, that specific stocks would drop in price afterward."

"So you can even make money on a stock when you know it will get killed? How's that?" he asked inquisitively.

"Sure. Definitely. Exactly right," I added for effect and without comment on his second poor choice of words in relation to the tragedy. "If you have foreknowledge of something like a terrorist attack and believe that the price of a company's stock will fall because of it, you can "sell short" its shares before the event and then "cover the short" after the attack. And if you leverage your advantage by buying "put" options you can make an incredible amount of money relative to what you risk: Sometimes many millions of dollars and hundreds of times your initial investment."

"Hundreds of times, huh?" he said slowly and with a voice drawn out by a nod. "But if you expect me to ask you to explain that short/put/leverage stuff then you should also expect me to come down there and punch you in the head."

"What? I don't expect anything, sorry, hold the punches," I pleaded as I pulled my right hand from its task under the bed loosening a piece of metal to join the other extended apologetically in front of my face, all the while unsure of what I said to cause offence. "Let me explain it without the asking or the punching. Please." I held still on my back with my arms straight ahead and took a long breath before continuing. "When you "short sell" a stock," I said putting air quotes around the words short sell, "you are borrowing shares from someone and then selling those same shares in the belief that their price will drop enough after your sale to later allow you to buy them back and return them at a profit."

"So I borrow a share from one guy, sell to another guy, and then keep the money. How do I find this first dude with the shares?" he asked hungrily as if discovering a criminal opportunity until then unknown.

"Borrowing shares to sell short is usually done through a brokerage firm that charges a fee for each share that you borrow, so you're not really dealing with an individual," I replied. "Of course, you eventually have to return the shares you borrowed so it's not just about borrowing shares, selling them, and keeping all the money. It's about borrowing the shares, selling them for one price, buying them back later for a lower price, returning them, and then keeping the difference between the initial selling price and the later buy-back price. In other words, when you sell a stock short your hope is that you can buy it back at a price that is lower than when you sold it. If that happens, you return the stock to the person from whom you borrowed it and pocket the difference between your selling price and the price at which you bought it back."

Whether as a prison affectation or to demonstrate understanding, he again accompanied his words with a slow and deliberate nod, this time held firm by a hand to his chin, "So, if the stock dropped ten dollars from when I sold it that ten dollars in profit is mine?"

"After you ..."

"Yah, yah, after I bought it back in the market and returned the shares I borrowed to the guy who lent them to me. I get that part."

"Yes, all yours. But if, instead, it rose ten dollars rather than dropped you would have lost ten dollars per share on your short sale -- so there are no guarantees. Unless, of course, there are guarantees because you know what will happen next; but, that's insider trading ... and wrong," I added with a tone of amusement that I promised myself would not accidentally accompany me to a future parole hearing. "But before I get into those "guaranteed" trades that I believe occurred before 9/11, you should know that such situations allow for another way to make even more money."

"More? How and how much?" he asked with genuine interest confirmed by the focus of his eyes again in a stare upon mine.

"If you have reason to believe that the price of a stock will drop you can not only make money by selling it short as I mentioned, but also by leveraging your short selling using "put" options."

"Is that the short/put/leverage stuff that almost got your head dummied-up?" he asked.

"Yes, almost," I agreed. "If I may, an "option" is a contract that allows its holder to sell or buy a stock at a specified price by a certain date. Options provide leverage because each one option represents one hundred shares of a company that, in the case of put options, can be sold, and, in the case of call options, can be bought at the prices specified in the contract."

"So if the option contract says I can sell a stock for ten dollars anytime before next week then I can sell it for that ten dollars even if the stock is only eight dollars today?" he asked.

"Exactly right," I said, somewhat astonished at how quickly he grasped the concept while still scoring another point for deference. "In the case of put options, they enable their owners to profit from declines in a stock's price because they allow the stock to be bought at the market price -- in your example that's eight dollars -- and then sold for the higher option price specified in the contract. Again, if the stock is trading at eight dollars and you have a ten-dollar put option, that put option will be worth at least two dollars or the difference between the eight dollar market price of the stock and the ten dollar exercise price of the option."

"I get that," he interrupted, "but what I don't understand is if holding one option is like controlling a hundred shares, why don't I just buy or like you said sell short a hundred shares myself? It doesn't make sense."

"You don't for many reasons," I explained cautiously. "Maybe you can't afford one hundred shares in the case of a call option or you don't want to put at risk the amount of money necessary to sell short one hundred shares covered by a put option or you don't want to worry about the expiry date connected to the option itself. Any of those reasons are valid, but if you actually had inside information about something that was going to happen you'd probably want to get the most bang for your buck through the use of options as the amount of money needed to acquire an option is a fraction of the cost of actually acquiring or selling short the one hundred shares each option represents."

"So if I am going to do it, I might as well do it right and make the most I can?" he asked in a voice demanding confirmation.

"To a degree, that's correct. Yes. Let me explain this type of trade using the example of put options that I just mentioned. As is the case when you are selling a share short, if you acquire a "put" option you are making a bet that a company's shares will be below a certain price by a certain date. For example, if you purchased one "November 50 Put Option in Company X" you are betting that Company X's stock will be trading below 50 dollars -- also known as the strike price -- at any time before the third Friday in November. Before you ask, all options have their expiry tied to the third Friday in each month that applies -- no reason. This means that if the price of Company X’s shares falls to 40 or 30 or 20 dollars before that third Friday in November, you can "put" those same one hundred shares represented by the option to the person that sold it to you. That person would then be forced under the contract to buy each of those shares for the 50-dollar strike price of the option. Again, regardless of the price of the stock at the time."

I could see from his expression that he was sufficiently engaged in our discussion to try to construct a question, so I stopped speaking and waited. "If I go and buy one of those put options it's just like I sold short a hundred shares at 50 dollars wanting it to go lower, right?" he asked.

"That's right. Exactly!" I added with exaggeration. "In my example, if the price of the stock drops to 40 dollars, your put option would be worth at least ten dollars -- or the difference between 50 and 40 dollars. Since one option represents one hundred shares, your trade would be equivalent to making ten dollars per share multiplied by one hundred ... or one thousand dollars. If that put option were trading at one dollar when you acquired it, you would have paid one hundred dollars or that one-dollar times the hundred shares that it represents. Excluding transaction costs, the trade in this example would result in a profit of nine hundred dollars (one thousand dollars minus the one-hundred-dollar cost to acquire the option) or nine times the one hundred dollars you placed at risk. That," I concluded, "is the power of leverage that options provide as even a small move in a stock's price will result in huge profits for the option holders; particularly, when timed properly."

"So if I had shorted one share at 50 dollars I would have made 10 bucks when it dropped from 50 to 40, but if I had bought one option for a hundred dollars or twice those 50 dollars I would have cleared about nine hundred bucks when the stock dropped that same ten bucks, from 50 to 40? Seriously?" he asked. "If that's true and I have your inside information that a stock will drop before that Friday date you mentioned, then I would be crazy not to buy as many put options as possible to make nine or ten times my money."

"Or more. I've actually seen returns of over three hundred times the money invested," I added to fuel his interest.

"Or more! Right. I want to make as much as I can with the inside information that I have because I don't know if I'll ever have that kind of info again or even have the money to do anything with it if I get it."

"What do you think happened before 9/11?" I asked as I turned over onto my back so as to allow my left hand to drop below the mattress and awkwardly take over my task.

"Were people buying a lot of put options hoping stock prices would go down?" he wondered, obvious with a hope that others shared his immorality.

"Yes, a huge number; particularly, compared to normal or average amounts," I explained.

"On the day before the attacks, about sixty times the average daily volume or near four thousand put options on American Airlines were traded. Similarly, there was a near ninety-fold increase in the daily volume of puts purchased on the stock of United Airlines in the five days before 9/11. That's not six or nine times I'm talking about," I made clear, "but sixty or ninety times the average daily volume on the two airlines directly involved in the crashes at the World Trade Center and the Pentagon."

"That's crazy. Are you the only one that noticed this?"

"No, no, this was obvious to a lot of people. So much so that in addition to being a subplot in both the Casino Royale and Taking of Pelham123 movie remakes it was addressed by the Commission established by the U.S. Government to examine 9/11. Curiously, the Commission dealt with it in a very limited and peculiar manner; or, at least one that was very peculiar and limited to me considering the questions that I would have asked and the trades that I would have focused upon if I was in the position of the investigators," I said before continuing.

"In discussing the issue of suspicious trading in options before the attacks, the Commission identified only a few trades for comment and then only to note that the purchasers of those put options had both valid explanations for their purchases and no conceivable ties to the terrorist group al Qaeda. For example, it attributed the put options purchased on United Airlines on September 6th to an institutional investor that bought them as part of a trading strategy and the puts purchased on American Airlines on September 10th to the advice of a widely read options-trading newsletter. It might have been the other way around, but that's not important ..." I added. "What the Commission did not do, and this is significant by its absence, was offer any explanation for the unusually high volume of put options purchased on stocks other than the airlines; and, for the airlines, on days other than those that it examined," I concluded after an emphasis on the word "other."

"Why does that matter?" he asked.

"Saying someone has no conceivable ties to al Qaeda is not the same thing as saying that someone did not have foreknowledge of the attacks -- did not know the attacks were going to happen before they happened. Someone that knew about the coming attacks, but that was nevertheless unconnected to al Qaeda could still have been involved in the purchase of put options or the shorting of shares -- so the narrowness of the point made by the Commission always stood out to me."

"So who was doing the trading? Making bets that things would go down and buying the put options that you say the Commission did not explain?" he asked.

"Honestly, I don't know," I said as I turned and slid my neck across my bed so as to better address the question from above, "but everyone that bought a put option in the days before 9/11 should be suspect unless proven otherwise and maybe still not even then considering the magnitude of the event and the amount of money involved."

"I always found it ridiculous to dismiss anyone from further scrutiny simply because they had a plausible sounding explanation and "no conceivable ties to al Qaeda," I said with voice loud enough to be heard through his mattress and over the yelling that now filled the area outside our cell. "Hell, I made sure I had a plausible sounding explanation to support every insider trade I ever made -- just in case I was ever asked by a broker or whomever about why I did it -- so the emphasis placed on that by the Commission really means nothing to anyone who has ever done it before, let alone over a hundred times like I did. As for not having connections to the terrorists, members of the FBI or CIA, for example, could have had information about the coming attacks and traded on that information or provided it to others and the Commission would still have been accurate when it reported that the purchasers of the puts that it examined had "no conceivable ties to al Qaeda" -- to say nothing of the purchasers of the thousands of put options that the Commission did not examine.

"Before you think that sounds crazy, I know of at least two reported cases where FBI agents were charged with giving short sellers damaging information about companies that the FBI was investigating so that they could sell short their shares before that information or the FBI investigation, itself, became public. I also remember reading a forensic accounting study by an economist named Naidu that looked at politically-sensitive companies in the weeks leading up to CIA-staged coups in Guatemala, Chile and Iran in the 1950s and 70s that found that the movement in the shares of those companies reflected information that no regular investor should have known about; namely, top secret meetings of those plotting the coups and Presidential approvals of CIA organized aid or invasions.

"Doesn't that make you feel like a bitch?" he questioned in a manner that seemed designed to insult rather than elicit a reply. "Some of the same kind of people that locked you up or passed laws to do it are making millions of dollars and getting away with it while you sit in here smellin' ass and scratching out four bucks and change a day on work detail if you can even get it."

"Yes, maybe," I paused while considering his assessment of my predicament before replying with a grasp of jail-house philosophy that probably startled him, "but no more so than how the dealer in stir feels being guarded by C.O.s whose number smuggle more drugs into his institution each day than he ever put on the street his whole damn life."

"Word ... there’s always someone getting over," he said in resignation, perhaps contemplating the events that led to his own imprisonment.

"But back to my larger point on 9/11," I continued. "In addition to being too narrow in the scope of its examination and conclusions, the Commission did not even address the trades in put options that I -- as an inside trader -- would categorize as the most suspicious considering that I would have made them."

"You bought put options before 9/11?" he asked.

"No, of course not, no, no. You misunderstood. What I am saying is that if I knew what was coming and was the kind of person that would want to profit from that information, there are specific stocks that I would short sell or buy put options against because of how directly affected I would expect them to be by the attacks. Stocks that I knew would make me a tonne of money when they went down."

"Trading immediately prior to 9/11 included a huge number of put options that were purchased on the shares of two financial service companies that held large tracts of office space in the World Trade Center. Morgan Stanley, which occupied twenty-two floors of the North Tower, saw over twenty-five hundred of its put options acquired in the three days before September 11 -- an enormous sum considering that the daily average for those contracts prior to that period was only about one one-hundredth of that or twenty seven. Similarly, Merrill Lynch, which had headquarters near the Twin Towers, saw over twelve thousand of its put options purchased in the four trading days before the attacks against an average volume of only about two hundred and fifty."

"If I was someone that had foreknowledge of 9/11 and wanted to make money from that informational advantage, I would have purchased put options on the shares of companies I expected to be harmed by the attacks. Obviously," I added to make my point clear. "That means that although I would have purchased put options on the shares of the airlines involved that lost planes, most of my purchases would have been bets against the brokerages that were headquartered in and around the World Trade Center because that's where I knew those same planes would be crashing.

Without analyzing it too deeply, I would have believed the airlines would be hurt by the loss to their fleets of the three or four or five planes and the affect that the crashes would have on future air travel and earnings. While I might have suspected that their stocks would suffer because of the attacks, I would have had less doubt about the shares of the two financial service companies mentioned. Unlike manufacturing concerns or even airlines, financial service companies use people rather than machines to make money. Therefore, an attack on the buildings of the World Trade Center was also an attack on the most valuable assets of those companies: their human capital or, in other words, the people working in the buildings that I expected to be killed. If I couple that with the symbolism of 9/11, which I remember Bin Laden saying was an assault on the American system of finance, I believe that the majority of my purchases of put options before 9/11 would have been in positions against the shares of those same brokerages whose offices I knew planes would be crashing into that morning."

"And there's nothing in the investigations or the 9/11 Report about those thousands of puts you mentioned or who bought them? Why not?" he asked.

"Maybe because the authors of the Report were afraid of the answers they would receive if they asked the right questions or looked at the wrong trades," I surmised. "Worse still, maybe they have the answers about who, how and why, but they don't want you, me, and everyone else to know. So, instead, they focus their investigation on a few innocent trades related to the airlines and hope that their explanations placate the public enough to leave it at that and not question more unusual trades on other days or even the overall integrity of the system itself."

"Screw the system then," George shot out.

"I already tried, George, that's why I'm here," I replied through a forced smile filled with regret.

The above blog post is for informational purposes only and based on my own observations and life experience and does not constitute financial, accounting, or legal advice. If you have any doubts as to the merits of any investment, you should always seek advice from a registered independent financial advisor of which I am not and have never been.

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