Cramer scandal shows regulators fail to police market manipulation


By Thomas Kostigen
Friday, March 23, 2007

SANTA MONICA, Calif. -- Jim Cramer, the boisterous host of CNBC's "Mad Money," recently bragged in an interview about manipulating stock prices when he was a Wall Street trader, proving all too directly -- and stupidly, I might add -- that investment professionals profit off the backs of the naive investing public.

Cramer is just admitting to a game every one on Wall Street knows: professional money managers use retail investors as pawns in their pursuit of high returns -- ridiculously so.

The question is whether Cramer and every other professional Wall Street investor should be faulted for using all the ammunition with which they are equipped -- market knowledge, sophisticated trading schemes, high technology, and public relations -- or whether it's the stupid investors who are duped who should be chastised.

It takes two to trade. And on the other side of every one of Jim Cramer's trades is (or was) someone willing to take the opposite bet from him. These aren't the buy-and-hold investors who have money in 401(k)s we're talking about here. These are active traders who step on to the Wall Street game field and think they can outperform the pros.

Is it any wonder that Cramer showboats?

If you've ever listened to or seen one of Cramer's broadcasts, you've heard the proverbial wingnut from Wisconsin yammering on about how his operation "charted" this stock or that by volume, futures activity, price level, or some other technical analysis. These are people willingly stepping into the zone with highly trained and skilled investment professionals who live and breathe the market -- and they play hardball.

Yet many dilettante investors see the show and think that they can play too. Only they play sans equipment and they get hurt.

Cramer was smart enough to realize that the capital markets are played just like a professional sports game. He decided some time ago to become a commentator. So it should be no surprise that he would spill some dirty little secrets from days gone by, such as manipulating futures to get quick gains in the options market, false-feeding the media, and taking advantage of the "moron longs" -- all in an attempt to enhance profits and get a bigger bonus at year-end.

"What's important when you are in that hedge-fund mode is to not do anything remotely truthful because the truth is so against your view that it's important to create a new truth, to develop a fiction," Cramer says.

His role in manipulation, or whatever it was, should bring consequences. But that should be a minor concern compared to getting the true culprits in all this: regulators.

In the Web interview with's executive editor Aaron Task, which is on YouTube and has been blasted all around the Internet, Cramer gave advice on how to keep a profit on a short-position by driving a stock price down. He gave a number of different examples of manipulation, which he admitted might be illegal, but said it didn't really matter because "the Securities and Exchange Commission never understands this."

And that is the sad point of Cramer's comments and this column: The people who are supposed to guard and protect the public's trust in the markets are letting the people down. They simply aren't doing their jobs effectively. For years the SEC tried to pin something, in a very public manner, on Cramer. But they could never really make anything stick; he ran circles around them.

There are now thousands of hedge fund managers playing tricks just like the old Cramer used to when he was running a hedge fund.
And regulators are looking on without making a call. And the public still continues to invest like they know better. And hedge fund managers continue to laugh all the way to the bank.

Jim Cramer may have a big mouth, but he laughs a lot too.

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