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Jim Cramer and I had a bit of a tiff a few weeks ago, so some readers might view this column as just another round in that fight. Others might see it as the pot calling the kettle black, orschadenfreude. Think what you will—but as the author of a column about bad investment advice, I feel compelled to comment on what just might qualify as the worst financial counsel ever offered.
As the New York Post, the New York Times, and Reuters recently reported, Cramer gave an interview on TheStreet.com’s Wall Street Confidential in late December (watch it here) that can be read as recommending that hedge funds boost returns by orchestrating stock prices and spreading false information. He said that “this is the way the market really works” and that those who don’t do these things “shouldn’t be in the game.” He also talked about his own practices—orchestrating stock prices—to boost returns at the hedge fund he ran in the 1990s.
Even those familiar with Cramer’s “just be outrageous” style will find this clip startling. It raises questions not only about Cramer’s activities as a hedge-fund manager, but about his judgment. It also, I think, threatens Cramer’s career.
Let’s begin by reviewing the definition of illegal market manipulation and what, exactly, Cramer said.
According to the SEC’s Web site, market “manipulation” is:
intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques … [such as] spreading false or misleading information about a company … or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those found guilty of manipulation are subject to criminal and civil penalties.
On the show, Cramer begins by ignoring a seemingly unrelated question and describing how he used to move the market futures. (Click here for a verbatim transcript of Cramer’s comments. The excerpts below include interpolations, indicated by brackets, that try to make sense of Cramer’s shorthand.)
A lot of times when I was short at my hedge fund—meaning I needed [the market to go] down—I would create a level of activity before [the market opened] that could drive the [pre-market] futures [down]. … Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and [buy] a bunch of stocks and make sure that they were higher … It’s a fun game, and it’s a lucrative game. You can move [the market] up and then fade it—that often creates a very negative feel. … That’s a strategy very worth doing. … I would encourage anyone in the hedge fund game to do it. Because it’s legal. And it is a very quick way to make money. And very satisfying.
Cramer says that this sort of maneuver is legal, which is a debatable proposition. And Cramer’s next comment appears to suggest that he at least thinks the behavior is something to hide:
By the way, no one else in the world would ever admit that. But I don’t care. And I’m not going to say it on TV.
(What Cramer meant by that last remark, presumably, was that he wasn’t going to say it on CNBC, which airs his hit show, Mad Money. That he said this while sitting in front of a TV camera is bizarre.) Cramer then goes on to describe what struggling hedge funds should do to improve their performance:
[Y]ou’ve really got to control the market. You can’t let it lift. When you get a [bellwether stock that is soaring like] Research in Motion, it’s really important to use a lot of your firepower to knock that down. … So, let’s say I were short. What I would do is hit a lot of guys with RIMM [sell a lot of Research in Motion stock to a lot of investors].
Cramer draws a line in the sand—briefly making it look as though he is not suggesting that hedge funds break the law. Then, he appears to recommend that they do.
Now, you can’t “foment.” That’s a violation. You can’t create yourself an impression that a stock’s down. But you do it anyway, because the SEC doesn’t understand it. [my emphasis]. That’s the only sense that I would say this is illegal. But a hedge fund that’s not up a lot [this late in the year] really has to do a lot now to save itself.This is different from what I was talking about at the beginning where I was talking about buying the QQQs and stuff. This is actually blatantly illegal. But when you have six days and your company may be in doubt because you’re down, I think it’s really important to foment—if I were one of these guys—foment an impression that Research in Motion isn’t any good. Because Research in Motion is the key today.
Until this point, Cramer has just played the role of coach. Next, however, in an example that could come back to haunt him—and in seemingly direct contrast to what he says in his just-released explanation—Cramer switches from adviser to practitioner:
What I used to do … if I wanted [a stock] to go higher, I would take and bid, take and bid, take and bid [repeatedly buy stock and then make an offer for more], and if I wanted it to go lower, I’d hit and offer, hit and offer, hit and offer [repeatedly sell stock and then put more up for sale]. And I could get a stock like Research in Motion—that might cost me $15 to $20 million to knock RIM down—but it would be fabulous, because it would beleaguer all the moron longs [investors betting the stock would go up] who are also keying on Research in Motion.
I’m not a lawyer, but it sure sounds to me as if Cramer is admitting here to a practice that is questionable at best. He then switches back to adviser mode and describes the next part of the game, which is to get reporters involved in helping your cause.
Again, when your company is in survival mode, it’s really important to defeat Research in Motion, and get the Pisanis of the world and the people talking about it as if there’s something wrong with Research in Motion [Bob Pisani is a reporter at CNBC]. Then you would call the [Wall Street] Journal and you would get the bozo reporter on Research in Motion, and you would feed that Palm’s got a killer [competitive product] that it’s going to give away. These are all the things you must do … and if you’re not doing it, maybe you shouldn’t be in the game.
Cramer does not say here explicitly that hedge funds should lie to the “bozo reporter” at the world’s top business publication, but a few minutes later, after describing how he would knock Apple’s stock down, he clarifies:
What’s important when you’re in that hedge-fund mode is to not do anything that’s remotely truthful. Because the truth is so against your view that it’s important to create a new truth to develop a fiction.
Later, Cramer summarizes:
The great thing about the market is it has nothing to do with the actual stocks. Now, maybe two weeks from now, the buyers will come to their senses and realize that everything that they heard was a lie, but then again, Fannie Mae lied about their earnings for $6 billion, so there’s just fiction and fiction and fiction. I think it’s important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push [the stock] down, then leak it to the press, and then get it on CNBC—that’s also very important. And then you have a kind of a vicious cycle down. It’s a pretty good game.
Is that the “way the market really works”? After a decade on Wall Street, I think it’s plausible that some hedge funds play such games. Do all of them? No. Do hedge funds and other investors have to break laws to do well? Absolutely not.
So, what happened here? I am speculating, but when this interview was shot, Wall Street Confidential was a new show, and I suspect that Cramer was trying to make it as sexy as possible. This desire, combined with his ego and shtick about being the-only-guy-with-the-guts-to-tell-it-like-it-is, probably helped him lose his mind temporarily.
What are the implications of the clip? Well, first, Cramer is once again giving terrible advice. How? By advising investors to engage in practices that might be considered illegal. Cramer appears to say it’s OK to orchestrate prices (“it’s important to foment …”). “The SEC doesn’t understand,” so you won’t get caught. Even if this were true, and even if the only consideration were risk/reward, this would be bad advice.
Second, Cramer is implicitly undermining everything he says on his CNBC show. The whole conceit of Mad Money is that small investors can compete with the Big Boys of Wall Street. Well, if this is really the way the Big Boys play the trading game, how can that possibly be true? Is Cramer just implying (but not saying) on Mad Money that small investors should break laws?
Third, Cramer is putting his employers (and regulators) in a bind. Yes, Cramer is a ratings and readership machine. TheStreet.com is a public company, however, and it presumably does not want to become embroiled in a controversy about whether its advice crosses the line. CNBC, meanwhile, is a subsidiary of GE, a company with a well-deserved global reputation for integrity, fairness, and quality. Leaving aside the insult that Cramer lobbed at “the Pisanis of the world,” can CNBC really say nothing when one of its most visible employees urges investors to use the network to engage in behavior that is questionable to say the least?
Lastly, there is the tar that Cramer dumped all over his former firm and the entire hedge-fund industry. Did Cramer’s former clients—such as Eliot Spitzer, former attorney general and now governor of New York, who made his name excoriating Wall Street practices (and me)—know that Cramer was engaging in these practices to boost returns? If so, what did they think of this? What does Gov. Spitzer think of it now? Cramer loves to boast about his hedge-fund record. At the very least, we now know where some of it came from.
This morning, in response to widespread outrage, Cramer published an explanation on TheStreet.com. In it, he says, “No one knows or respects the securities laws more than I do.” He says that he was just describing other, dirty hedge funds in his “hyperbolic and tongue-in-cheek style”—and that he himself was clean as a whistle. He never mentions that he was recommending that some hedge funds engage in these practices. He implies that critics of the interview are just “competitors” or professional investors who want to shut him up. To those who have listened closely to the interview, this is almost insulting.
So far, CNBC, Cramer’s biggest platform, has remained quiet on the topic. (A spokesman has not returned my call). This is probably because 1) they are hoping the whole thing will just blow over, and/or 2) they don’t know what to say. It is certainly possible that the whole thing will pass: Cramer has been very effective at stifling or weathering critics. It is also possible, however, that Jim Cramer has committed professional suicide.