The Anomalous Citigroup Trading Near 9/11

The Securities and Exchange Commission (SEC) recently passed the new rule 10c-1a that requires identifying borrowers of securities loans—i.e. it effectively eliminates the anonymous shorting of stocks wherein investors bet that a stock price will collapse.

In the announcement, the SEC references how stock shorting played a role in the 2007-2008 market collapse, but that’s not the only major event that stock shorting has been associated with. Part of the investigation into the events that led to the terrorist attacks on September 11, 2001 was a focus on potential insider trading days leading up to it.

Numerous news stories in major publications detailed suspicious trading of stocks in United Airlines and American Airlines—the two companies whose jets were involved in the attack—in the days prior. Other stories focused on potential insider trading of reinsurance companies like Munich Re, oil and gas commodities, U.S. treasuries, and futures contracts, both in the U.S. and abroad.

Stock markets shut down trading on September 11th, but once they reopened stocks across the board collapsed, with some stocks falling more than others. Foreign investments also took a hit, particularly those who might be directly affected by the catastrophe.

There were also numerous stories of citizens being warned to avoid New York City on that day and others who tried making trades in the days before, like that of the Egyptian stock adviser. The implication is that there were others potentially connected to the terrorists that used inside knowledge of the upcoming attacks for financial gain. One BBC story indicated that Osama Bin Laden himself might have been trading on the upcoming catastrophe.

One story in the San Francisco Gate indicated millions earned from options trades were still sitting in the account used, implying the trader didn’t have enough time to withdraw their windfall.

The president of the German Central Bank, Ernst Welteke, made public accusations of insider trading in airline stocks, reinsurance firms, and gold and oil futures, but German officials backtracked on such accusations. The German securities regulator, BAWe (Bundesaufsichtsamt für den Wertpapierhandel) found no evidence of illicit trading according to the 9/11 Commission report.

Originally, the SEC’s investigation was set to focus solely on Munich Re, but expanded to include dozens of companies. Eventually they found no evidence showing any connection to the attackers profiting from securities transactions.

Data in the SEC report showed some spikes in trading of calls and puts—options to buy or sell a stock in the future—of airlines and insurance companies in the week before the attack, but nothing particularly significant.

They interviewed some of the hedge funds behind the investments and found nothing suspicious. Bets against the stocks were largely part of long-term trading strategies that would not have benefited from short swings in the stock price. A long-term bet would also explain why the funds from the options trades had yet to be collected, as described in the SF Gate story.

United’s stock would lose a third of its value from September 11th to the end of the year, falling by almost $20 a share—the largest loss by a single carrier. But airline company stocks were in decline in the previous days and were expected to struggle due to lower demand. Analysts like Goldman Sachs and the newsletter Options Hotline published negative outlooks for the sector in recent days. The majority of options trades in airlines came from a single institutional investor with no conceivable links to the terrorists.

But while the anomalies in airline trading were revealed to be innocuous, no details were provided surrounding suspicious trading of Citigroup.

Not just isolated spikes from individual investors, Citigroup’s trading volume would suddenly dominate the markets in the week before 9/11 and was likely one of the most actively traded options at the time.

The bank’s stock price would tank in the days before and after the attack in a much larger way than any of the other investigated companies, losing around $70 per share in value. This would ostensibly lead to a much larger payday for anybody who might have shorted the stock using put options—betting on a price collapse—especially considering the number of put options placed that week.

Travelers Insurance, then a subsidiary of Citigroup, along with Swiss Re, Munich Re, and American International Group (AIG)—all subjects of the SEC investigation—would likely have to make payments related to the World Trade Center damage, potentially up to $5 billion, and they entered into longstanding legal feud over how much the developer should be compensated based on their policy. A report from the Rand Institute approximated the total benefits paid from all possible insurers related to 9/11 at $38.1 billion.

Additionally, one of the tenants of WTC 7 was the investment firm Salomon Smith Barney, which was then a subsidiary of Citigroup. Citigroup would also enter into a long legal feud with the owner of the World Trade Center over costs incurred from the buildings’ collapse. Details of anomalous trading in Citigroup did not appear in the 9/11 Commission report.

Caveat: Data points from that time period are limited in availability, so the closest available dates are used for this analysis.

For other suspicious equity trades the SEC interviewed large-scale investors behind the put option purchases with the help of the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE).

But for Citigroup the investigators simply described the activity as not suspicious. It doesn’t appear that the SEC spoke to any investors behind the trades as they did for United Airlines:

Following a review of those trading records neither the NYSE nor the CBOE identified any suspicious activity in Citigroup common stock or options prior to the events of September 11.

Within two weeks, Citigroup’s stock would rebound to where it was in the weeks prior to September 11.

SEC Report Details

Per the SEC’s report, the following industries were investigated: airlines, insurers, financial services, defense and aerospace, security providers, and travel and leisure services as well as financial products like exchange traded funds (ETFs).

They also looked for any trades by individuals connected to the terrorists. Following coordination with regulators in foreign companies, they compiled a list of 38 additional companies worth scrutinizing for suspicious trading.

No unusual trading was identified in most of the industries, except for airlines and insurance. Of those two industries, they filtered down their focus to the following that had anomalous trading:

• American Airlines (NYSE: AMR)

• United Airlines (NYSE: UAL)

• Munich Reinsurance Co.

• Swiss Reinsurance Co.

• XL Capital Ltd. (NYSE: XL)

• American International Group, Inc. (NYSE: AIG)

• Citigroup, Inc. (NYSE: C)

• Marsh & McLennan (NYSE: MMC)

• AON Corp. (NYSE: AON)

Since Munich Re and Swiss Re aren’t traded on U.S. markets, they were not included in the SEC’s investigation.

Put/Call Volumes

While some stocks had spikes in put trading volume in the week before 9/11, put/call ratios—a measure of volume trading by how much the market believes the stock will decline (put) versus increase (call)—weren’t particularly high for the week pre-9/11 compared to the overall market average (.73 as of December, 2001) except for that of Marsh & McLennan.

Marsh & McLennan is a professional services firm that handles insurance and reinsurance that had offices in the World Trade Center. None of the Marsh & McLennan employees in the building survived. While the offices there were destroyed, the company’s stock was not particularly affected, so any attempt to bet against the company with inside knowledge would not have been particularly profitable.

While not as high as Marsh & McLennan, Citigroup, United Airlines, and AON Corp. all had put/call ratios above market averages.

Trading Volume

Except for Citigroup and AIG, total daily trading volume for those stocks never surpassed 5,000 trades during the week. AIG would have a spike on September 5th to 20,000 trades in one day, mostly calls (weekly put/call ratio: .342).

But Citigroup stands out with a run of 20,000 to 60,000 daily options trades through September 10th, largely put options (put/call ratio 1.13).

Data on most active trades around that time is limited, but that would easily place Citigroup as one of the most traded stocks of the week. From February 3rd, 2001, the CBOE listed the most active stock of the time as E2Gold, with 30,000 trades per day.

Spikes in volume can indicate an individual investor making a large trade, potentially indicative of insider knowledge, but that is also unlikely as it would be highly suspicious.