Media Ignore CNBC Anchor Advising Hedge Funds How to Lie and Cheat to Make Money

March 22nd, 2007 1:47 PM

Something rather extraordinary occurred last December which had extremely ominous implications for stock investors around the world, but got totally ignored by the media.

In fact, if not for a recent video posting at YouTube, and a March 20 article in the New York Post, these spectacular revelations would still be well under the radar.

On December 22, CNBC’s James Cramer did a web interview for TV. In it, he told TSC’s executive editor Aaron Task about how he used to manipulate stocks and the market when he was a hedge fund manager, and explained how such people today can’t “do anything remotely truthful” if they want to make money (video available here).

As TSC reported in a recap at its website the same day (emphasis added throughout):

It doesn't take much money to sway the stock market, Jim Cramer said on TV's Wall Street Confidential video Webcast Friday.

In fact, when Cramer was short stock during his hedge fund days, meaning he was betting the stocks would fall, he would look to create a level of activity beforehand that could drive the futures lower, he told Aaron Task, the host of Wall Street Confidential.

Although the intricacies discussed might be a tad technical, what Cramer was admitting was how he and other hedge fund managers can manipulate stocks during the day for their own financial gain, and potentially your detriment. In fact, he was encouraging traders to do it if they currently aren’t:

And sometimes, hedge fund investors boost the futures to create a false sense of excitement that can quickly turn negative when the sellers come in, Cramer said. He encouraged anyone in the hedge fund game to follow this strategy, as it's legal and a "very quick way to make money."

Cramer then gave a specific example of how he would manipulate a rather well-known stock:

Similarly, it's important for market players who are short Apple (AAPL) to spread rumors that Verizon (VZ) and AT&T (T) don't like Apple's new phone.

Cramer said Apple is an "ideal short," and said if he were short the stock, he would call six trading desks and say he just got off with his contact at Verizon, who said that the company has no room for Apple.

"It's a very effective way to keep a stock down," he said. "What's important when you're in the hedge fund mode is to not do anything remotely truthful, because the truth is so against your view."

So, Cramer was advising people who were betting that Apple shares would decline to call stock trading desks and lie.

Shocking, yes? Yet, a LexisNexis search identified that not one major media outlet covered this story when it occurred.

Now, you might be wondering why they should have. After all, people are manipulating stocks all the time. Why’s this anything new?

Well, hedge funds are continually taking on a larger and larger role in the trading of stocks, bonds, and commodities. As a result, they have a huge impact on the price of virtually all investments on the landscape, as well as what you're paying for gasoline to drive your car, electricity to power your house, and food to put on your dining room table.

For instance, there are many experts who believe that hedge funds have a huge impact on oil and gas futures, and that the retail price on both would be significantly lower if not for these speculators.

Certainly, that’s debatable. However, these funds operate with huge leverage, meaning that they mostly are using borrowed money from banks and investment houses for their transactions. And, when they get in trouble, as in the case of Long-Term Capital Management in 1998, they can be responsible for huge declines in stocks just because they’re on the wrong side of the market.

Consider that in October 1987, the world got its first glimpse of what can happen when computers take over equity trading, and large investment groups are on the wrong side of the market. Today, the number of such funds dwarfs what existed twenty years ago. As a result, any information about how these funds work, especially coming from an insider like Cramer, needs to be disseminated to the public.

After all, one of the basic tenets of capitalism is caveat emptor. However, how is the buyer to beware if the media aren’t disseminating all the information available?

*****Update: The Corporate Crime Reporter has more on this issue here. Also, according to CCR, Cramer was on with Don Imus this morning making some apologies about all this now that it has come to light (h/t TVNewser):

A contrite and nervous sounding Cramer told MSNBC’s Don Imus that “mistakes were made” when he appeared on the internet business television show claiming that hedge fund managers were manipulating the market, through both legal and illegal means, making disparaging remarks about his fellow financial journalists at CNBC and the Wall Street Journal, encouraging market players to engage in illegal activity – and implying that he too engaged in illegal activity when he was in the hedge fund business.

“I have to either shut up or get better at telling what I did or didn’t do,” Cramer told Imus. “I didn’t do a good job at distinguishing between the two.”

Did he engage in illegal activity?

“I was saying – I have to show you the scams that other people do,” Cramer told Imus. “I have to show you how Wall Street really works. I didn’t say it right. I have to get better at saying it. I did not do the stuff. But I didn’t say it right.”