by Christian Berthelsen
Chronicle Staff Writer
September 22, 2001
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In another sign that some investors speculated against the stocks of airlines whose jets were used in terrorist attacks on New York and the Pentagon, there was a sharp increase in short selling of the stocks of American and United airlines during the month before Sept. 11.
The trading activity far outpaced the rise in short selling for all stocks on the New York Stock Exchange -- or other major airline stocks as a group on the Big Board -- according to a computer analysis by The Chronicle of data released yesterday by the New York Stock Exchange.
A short sale is essentially a financial market bet that the value of a particular stock will drop. In a successful short sale, an investor borrows the stock from a broker, sells it and then repurchases it at a lower price, returning the shares to their owner and turning a profit on the difference.
Federal securities and law enforcement investigators have been looking at unusual trading activities in the stocks of AMR Corp. and UAL Corp., the parent companies of American and United, as well as a number of other securities in the days leading up to the terrorist attacks. Specifically, the investigators want to determine whether someone with advanced knowledge of what would happen was trying to profit on the ensuing financial downturn.
The data released yesterday is part of the NYSE's regular monthly report on short-selling. It shows that investors shorted nearly 4.39 million shares of UAL in portions of August and September. That represented an increase of 1.25 million shares, or 40 percent over the previous month's level.
Meanwhile, investors shorted more than 2.98 million shares of AMR, a jump of nearly 497,000 shares, or 20 percent above what it was in August.
Those increases were far larger than the average shorting of stocks for the two companies' major competitors on the exchange, including Delta, Continental,
US Airways and Southwest. As a group, the competitors saw an increase in shorting of only 11 percent. And shorting on the exchange overall totaled only a one percent increase.
As reported previously, some of the suspicious trading under investigation by market monitors, the FBI and the Securities and Exchange Commission include an unusual spike in the purchase of "put" options on the stocks of AMR and UAL.
A put is essentially a bet that the stock will decline, giving the buyer the right to sell the stock at a set price at a set time and delivering profits when the share price drops lower than the agreed sale price.
To be sure, there are a number of legitimate reasons to account for the increase in short selling that have nothing to do with terrorism.
For instance, the airline industry was in serious finance trouble even prior to the attacks, as business and consumer travel demand slacked off in a weakening economy. And both AMR and UAL posted huge second-quarter losses in July and said they could be in the red for the rest of the year.
What's more, short-selling on the exchange has become increasingly prevalent. Each month has seen a record high, with a new peak of 5.98 billion shares shorted this month.
Still, anyone shorting shares of AMR and UAL would have turned a strong profit. UAL closed yesterday at $17.13 per share, off 44 percent from its close of $30.82 the day before the attack. AMR is down 40 percent, closing at $17.90 yesterday from $29.70 on Sept. 10.
Only one carrier, US Airways, saw a higher jump in short sales, with an increase of 41 percent. But there were obvious reasons to short that company: US Airways is laden with debt and was the target of a takeover bid from United that failed in July.
As with put options, it is difficult to tell how much money was made in the short selling of UAL and AMR stocks without more specific information about sale and repurchase prices and dates of execution.