Cramer confesses:
Extra3/23/2007 4:30 PM ET
Jim Cramer: Here's how to cheat
The popular CNBC host, a former hedge fund manager, could draw scrutiny from federal regulators after telling an interviewer about methods for manipulating the stock market.
Stock market commentator and CNBC television host Jim Cramer has raised eyebrows after describing illegal activities used by hedge fund managers to manipulate stock prices.
In a December video interview on the Web site of TheStreet.com (TSCM, news, msgs), a financial news company he co-founded, Cramer, while never saying he used such tactics himself, described how it was possible to push stocks higher or lower at his previous job running a hedge fund.
The interview, which has received widespread attention only after being posted to online video site YouTube, may be studied by government and stock market regulators, said hedge fund experts and legal sources.
Cramer: It's a fun, lucrative game
The interview described methods, including tactical buying, shorting and using options, to create an impression in the market that could prompt other traders and investors to buy or sell a stock.
"A lot of times when I was short at my hedge fund . . . meaning I needed (a stock) down, I would create a level of activity beforehand that could drive the futures," said Cramer. "It's a fun game and it's a lucrative game."
Cramer, host of the popular CNBC television show "Mad Money," described other tactics that could be used to drive down technology stocks such as Research in Motion (RIMM, news, msgs) or Apple (AAPL, news, msgs) to make them cheaper to purchase later. CNBC is owned by General Electric (GE, news, msgs).
In the interview, Cramer said a hedge fund manager's favorite tactic is to get a rumor about a stock to an unwitting reporter -- at The Wall Street Journal or at his current employer, CNBC -- and hope that it moves the stock in the direction the manager wants.
Cramer said some tactics are "blatantly illegal" but sometimes essential for poorly performing hedge funds.
Cramer said if a market participant wanted to get shares of a company like Research in Motion lower, then he should first get investors "talking about it as if there is something wrong with RIMM. Then you call the (Wall Street) Journal and get the bozo reporter in Research in Motion and you would feed that (rival) Palm's (PALM, news, msgs) got a killer it's going to give away," he said. "These are all the things that you must do on a day like today and if you're not doing it, maybe you shouldn't be in the game.
"It might cost me $15 million or $20 million to knock RIMM down but it would be fabulous because it would beleaguer all the moron longs who are also keying on Research in Motion," Cramer said.
He also said the Securities and Exchange Commission does not understand some illegal activity.
Challenging financial regulators?
Hedge fund lawyer Ron Geffner of Sadis & Goldberg called the interview a "somewhat surprising confession to make publicly, which definitely invites suspicion by regulators."
"Whether he violated the law is unclear," Geffner said. "That is dependent on his trading records. But it's clear that he seems to be challenging regulators to come and examine him."
A spokesman for the SEC declined to comment on whether the agency is looking at Cramer's comments. A decade ago Cramer faced an SEC investigation over a column he wrote for SmartMoney magazine that touted four stocks without disclosing his holdings in them. He was eventually cleared of wrongdoing, according to news reports.
Other legal experts criticized Cramer's comments for suggesting that stock manipulation is widespread among the growing legions of hedge funds, which are investment vehicles that typically trade much more actively and use more complex strategies than mutual funds.
"This makes it sound like everyone is doing it, and the reality is that most hedge funds are not engaged in this kind of manipulative behavior," said Laurel FitzPatrick, a hedge fund lawyer with Ropes & Gray.
Cramer could not be reached for comment following calls to both TheStreet.com and CNBC. Spokespeople for CNBC and TheStreet.com were unavailable for comment.
Cramer said in the interview that he would not make such comments on his CNBC show.
Cramer, who regularly gives opinions on stocks on his daily TV show, also said stock market movements are often unconnected to the fundamental qualities of the underlying company.
"Who cares about the fundamentals?" he said. "The great thing about the market is that it has nothing to do with the actual stocks."
This article was reported and written by Dane Hamilton for Reuters. Hamilton previously worked for TheStreet.com.
Send stock manipulators to: enforcement@sec.gov-and to jail.
