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Thursday December 06, 2001 02:39:48 PM

SEC asks Goldman, Lehman for data


(Original publication: Sept. 20, 2001)

NEW YORK — The Securities and Exchange Commission asked Goldman, Sachs & Co. and Lehman Brothers Holdings Inc. for data about trading in Morgan Stanley Dean Witter & Co. and insurers or airlines affected by last week's terrorist attacks, people familiar with the requests said.

The prospect that terrorists may have profited in U.S. markets from inside knowledge of planned assaults on the World Trade Center and the Pentagon is being probed by the SEC, the Chicago Board Options Exchange, and regulators in Europe and Asia. SEC Chairman Harvey Pitt has said investigators are reviewing "a variety of market actions." He gave no details.

"It's not that far-fetched," said former SEC enforcement director William McLucas. "This collection of terrorist acts has created a serious problem for our markets and a number of industry sectors. It is not as wacky or as Tom Clancy-ish as one might like to wish."

An SEC spokesman declined to comment about requests to Goldman Sachs and Lehman, and wouldn't say what other Wall Street firms have been asked for information.

Morgan Stanley, which occupied 22 floors at the World Trade Center, experienced bigger-than-normal pre-attack trading of options that profit when stock prices fall. Other companies that were directly affected by the tragedy had similar jumps. Options trading at AMR Corp. and UAL Corp. surged before terrorists hijacked and crashed two American Airlines and two United Airlines jets.

The CBOE, the biggest options exchange and a market regulator, has acknowledged that it's investigating trades that may signal advance knowledge of the catastrophe.

'Suspicious trading'

Market makers who handle trading in AMR and UAL options said they had noticed "suspicious" or "peculiar" trading in the days before the terrorist attacks and have been questioned by regulators.

Over three days before terrorists flattened the World Trade Center and damaged the Pentagon, there was more than 25 times the previous daily average trading in a Morgan Stanley "put" option that makes money when shares fall below $45. Trading in similar AMR and UAL put options, which make money when their stocks fall below $30 apiece, surged to as much as 285 times the average trading up to that time.

Morgan Stanley shares fell $2.50 in late trading to $39.70, and have dropped almost 19 percent since the trade center attacks. AMR shares fell 80 cents to $19.20, and are down 35 percent since Sept. 10. UAL shares fell 98 cents to $18.01, after plummeting almost 42 percent since the attack.

Hard to trace?

Market and brokerage records may help show whether the U.S.'s prime suspect Osama bin Laden or other terrorists were behind high-volume trading, and may help securities regulators trace a money trail to some of those responsible for the attacks at the World Trade Center.

"I would expect it to be a priority at least until they discover where those trades came from," said Alan Bromberg, a law professor at Southern Methodist University. Tracing money to its source may be difficult because traders "presumably would be clever enough to do it through some sort of entities — trust, foundations, companies — that would be a little harder to trace back to the individuals really involved."

One day before two American Airlines jets were hijacked and crashed, 1,535 contracts changed hands on options that bring a profit if AMR stock falls below $30 per share before Oct. 20. That was more than 60 times the previous daily average, according to a Bloomberg analysis of options market data. Similarly, October $30 put options for UAL soared, with 2,000 contracts traded on Sept. 6, three trading days before the attack. That was 285 times the previous average trading.

At Morgan Stanley, trading in October $45 put options jumped to 2,157 contracts traded between Sept. 6 and Sept. 10, almost 27 times a previous daily average of 27 contracts.

Citigroup Inc., which has estimated that its Travelers insurance unit may pay $500 million in claims from the World Trade Center attack, had about 45 times the normal volume during three trading days before the attack for options that profit if the stock falls below $40. Citigroup shares fell $1.25 in late trading to $38.09.

See our News Archive for the complete story since Sept. 11.

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