A couple weeks ago, CNBC Mad Money host and former hedge fund manager Jim Cramer endured his latest bout with what appears to be a rare strain of Tourette’s syndrome: every five years or so the patient experiences an uncontrollable urge to confess publicly to securities violations. For an earlier extended attack, see Cramer’s 2002 autobiography, Confessions of a Street Addict. (Full disclosure: I met Cramer socially once, and liked him.)
Cramer’s latest relapse came to light last month, of course, when clips surfaced on YouTube of an online video interview he had given last December to TheStreet.com, a site Cramer cofounded. For the clip, try here or here. On the show, Cramer purported to describe how he used to generate activity in a stock — investing say $5 million in the futures market to spur it upwards — and then lying to gullible traders and reporters, making up some story about why powerful players had told him they were bullish. The press then either propagated the rumors or simply reported the futures activity, causing the stock to climb still further, allowing Cramer to, in essence, get maybe a $100 million worth of market leverage from a $5 million investment. He also described engaging in analogous deceptions in order to “knock down” stocks that he was shorting, or crucial “fulcrum” stocks that were carrying along other stocks he was shorting.
He suggested that this sort of activity could become virtually a matter of survival to a hedge fund manager as the fund approached “payday,” when customers’ profits or losses were tallied and they were entitled to withdraw their money if they weren’t satisfied. “You can’t [legally] create a — yourself, an impression that a stock’s down,” he said. “But you do it anyway, ’cause the SEC doesn’t understand it. . . . That’s the only sense that I would say this is illegal. But a hedge fund that’s not up a lot really has to do a lot now to save itself.”
As an example, he spoke about Research In Motion (RIMM), which was both up and playing a “fulcrum” role in the market last December, when the interview was occurring. “When your company is in a survival mode,” Cramer said, “it’s really important to defeat Research In Motion and get the Pisanis of the world” — alluding to his colleague, CNBC reporter Bob Pisani — “talking about it as if there’s something wrong with RIMM. Then you call the [Wall Street] Journal and get the bozo reporter on Research In Motion. And you feed that there’s a – that Palm’s got a killer [new device] it’s gonna give away. These are all the things you must do on a day like today. And if you’re not doing it, maybe you shouldn’t be in the game.”
According to a securities law professor who watched the tape at my request, many of the recommended activities appeared to violate either Section 9(a) or 10(b) of the Securities Act of 1934 (or both), which prohibit stock manipulation and fraud, respectively.
“It’s real simple,” said the professor, who requested anonymity. “If somebody lies to the press with a state of mind embracing intent to deceive . . . and it’s foreseeable that it will affect a stock price, then the person is liable.” That’s so, he notes, even if the deceiver doesn’t even personally trade in the stock. “Then add to that, he traded the stock: Game over.”
After the The New York Post and Fox News began reporting on the peculiar Cramer clip in March, Cramer appeared on Imus and argued that his TheStreet.com appearance had actually been a sort of If-I-Did-It turn. He had only been describing how he would have committed these offenses if he’d been of such a mind, and how he believed other hedge funds actually were behaving; he had not been confessing that he personally had behaved that way. “I tried to run a clean shop,” he said. (He also apologized to, and spoke highly of, Pisani.)
As for what precisely makes Cramer tick, that’s well beyond the scope of this blog, and a good topic for writer-neurologist Oliver Sacks to tackle. (Fortunately for Cramer, his malady is not debilitating; it evidently leaves no lasting scars on those who suffer from it so long as they maintain good cable ratings.)
But in an era where hedge funds now dominate, the Cramer story merits more attention than it received, which is why I’m belatedly revisiting it. (I stayed away initially, expecting deep dives by the Journal and Times, but they never materialized. All the clip ever seemed to attract were a flurry of blog postings and some gleeful gotchas from subsidiaries of News Corp. (NWS) , which is about to launch a cable business news channel that will compete with CNBC. (Perhaps News Corp. also resented Cramer’s encroachment on the If-I-Did-It genre, which News Corp. invented.)
Though Cramer was discussing manipulations that were intended to last only a few hours, other hedge fund manipulations may be playing out over many months. My colleague Bethany McLean did a fascinating feature story (for which, click here) recently depicting what appears to be a paradigmatic contemporary cat-and-mouse story: A hedge fund unearths allegedly negative information about a public company, shorts the stock, and then relentlessly seeks to publicize the negative information; the company, in turn, tries to silence and intimidate its critics through lawsuits, while launching a press counteroffensive. In the past two years or so Biovail (BVF), Overstock.com (OSTK), and Fairfax Financial Holdings (FFH) have all sued hedge funds alleging that they were manipulating and sabotaging their stock.
The playing field for this savage contact sport is the media, where reporters like me are desperately left trying to figure out what is news and what is pseudo-news. (Even an undeniable flurry of futures activity may be being created solely for the purpose of having it be reported. If we don’t know what’s causing it, should we refrain from reporting it?) The question seems to be not so much whether to be manipulated, but rather, when, and by whom?
Traditionally, judges have stuck their heads in the sand and assumed that the market sagely ignores unattributed rumors. “Investors tend to discount information in newspaper articles and analyst reports when the author is unable to cite specific, attributable information from the company,” Judge Jon O. Newman optimistically wrote in 1993 for a unanimous panel of the federal appeals court in New York. “Thus, the opportunity to manipulate stock prices through the planting of false stories is somewhat limited.”
Maybe that was true in 1993, before user-friendly Internet browsers and a host of other technological advances turbo-charged the pace of news-gathering, stock-trading, and rumor-mongering. But if Cramer’s latest candor attack means anything, it means that, as an empirical matter, Judge Newman is dead wrong. In effect, Cramer’s telling Newman, my securities professor source tells me: What are you, nuts?
“It’s a fun game, and it’s a lucrative game,” Cramer told his host, Aaron Task. “Who cares about the fundamentals? . . . The great thing about the market is it has nothing to do with the actual stocks.”
In this setting, what’s a business reporter to do?
