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.
So how was Cramer supposed to have violated these strictures? Cramer said something like the following:
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.
I'm not sure how often Blodget watches Cramer's Mad Money TV show on CNBC, but it has to be less than I do, because I know what Cramer is talking about because he has stated it on his show numerous times. (For the record I catch parts of Mad Money a couple times a week, and a whole show once in a blue moon, so you need not have been a devotee to learn this stuff.) Hedge funds are not like you and me for various reasons. For starters the sheer size of the investments they make will have an affect on the markets no matter what. Money drives the market. Hedge funds have crap loads of money. Therefore hedge funds drive the market. If that is manipulation than every hedge fund is guilty. Secondly, there are whole categories of investors watching and waiting to see what the big funds do. People believe that the big funds know things they don't know. So if a fund starts selling a particular stock, people will believe it is because they have figured out or found out something negative about the company that is causing the selling.
Cramer tells folks that this simply isn't true. Hedge funds will be "down" on one stock and "up" on another not because of anything to do with the fundamentals of the companies involved, but because being "down" on a stock is how they are betting they can make money. Cramer stated: You can move [the market] up and then fade it—that often creates a very negative feel. "Feel" is exactly the right word here. Patterns of buying or selling will make a psychological impression on the people who watch hedge funds, that may lead people to under or over value a stock for no good reason. In what way is that "artificially affecting" the market? If Cramer or any other hedge fund manager is talking to a reporter who asks why they were selling stock X, and they respond that they really don't like it there is nothing wrong with that. If the bozos (Cramer's term) print or report that on TV, how is there anything wrong with that? If they had set up their investments in such a way that not liking a stock could make them money, they have every right to continue to not like the stock. If the financial reporters do not do their homework and simply report the gossip without checking it out first the only blame lies with the reporters.
More Cramer:
[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].
Blodget says:
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.
Blodget could have saved his readers a little bit of time by trying to parse Cramer speak a little bit here. '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.'
You can't go around lying to people about the status of a company's profitability. That is illegal. Cramer is telling us that hedge funds do not HAVE to tell people lies. If they act like they don't like a stock, by selling it for example, people who hawk over the hedge funds will draw their own conclusions. The results often drive the market in exactly the way the hedge fund manager want it. How can you make people drawing conclusions illegal?
Cramer sums up what he thinks goes on:
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.
Cramer has stated this scenario more than once on Mad Money to point out how the market can really work so that the "home gamers" have a clue what might be going on. So, with this knowledge, if you have a position in a strong company with good "fundies", you might not panic sell because of a hedge fund driven sell off. How is that a bad thing?
Blodget continues:
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.
This would make sense if he could point out exactly how this could be construed as breaking the law. All Jim Cramer has done is to have the unmitigated Gaul to point out that a lot of the market is driven by irrational forces and that the good hedge fund managers try to make money off of those tendencies.
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