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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.