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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
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].
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