Following the collapse of the World Trade Center (WTC) in New York City on September 11, 2001, the stock markets were closed for several days. When the stock markets reopened on Monday, September 17, 2001, there was unusual activity in stocks that were hit the hardest by the attacks and subsequent shutdown of the U.S. airline industry: airlines and insurance. Investors based in Europe had purchased puts in airline and insurance companies with the expectation of earning returns based on the fall in these companies’ share prices.

Puts work as follows: A company sells 1,000,000 put options on its stock (trading at $100 per share) exercisable at $100 within a month or two months or one year. Investors buy the puts at $10 a share. The company pockets $10,000,000 in cash.

When the put date arrives: If the stock price is $100 or more, the puts expire worthless. Company A has made $10,000,000. If the stock price drops to $50, the investor can buy shares at $50 and exercise the puts. Company A must buy back the shares at $100. The company loses $50 million less its $10 million for a net loss of $40 million.

In the case of the WTC disaster, someone with advance knowledge of the attacks, by buying puts, bet that the stocks of these companies would go down. They were correct, and the SEC placed a hold on the payments to the put holders as investigators looked into trading on inside information and tracing the links of those who bought the puts. Would advance knowledge of the attacks be a form of inside information? Would buying with that advance knowledge be a violation of 10(b)? What about the fact that they were foreign investors?