The New York Post has an article from this morning out saying that Jim Cramer may have revealed too much about stock manipulation when short selling stocks from his days at a hedge fund.  This is being passed around today in chat rooms, blogs, and articles.  The NY Post article also notes that the acknowledgment that some of his actions may have been illegal.  While the article does point out the faults of Cramer, they leave themselves and BIG MEDIA out of the picture completely. 

Before you think this is an online "defensive" call for the practice of spreading rumors or even a defense of Cramer, think again.  You can bet that if you went up and asked Jim Cramer himself who was the most controversial and most loved or hated financial market pundit on TV or with a huge audience right now, then he would probably answer, "Jim Cramer."   Sometimes his stance and is great and sometimes it isn’t.  That’s life.

Stock manipulation of any sort is wrong, but investors need to know there are tricks that the investment community uses DAILY now and forever that anyone could deem manipulative.  It is not just hedge funds or short sellers that manipulate or try to manipulate stocks.  Day traders, brokers, analysts, hedge fund managers, stock promoters and others have all seen this more than once if they have been around.  If you are an active trader or if you have a lot of "connected contacts" then think back to the number of times that you have received the exact same instant message within a few minutes from completely unrelated sources where the same message has been copied and pasted and forwarded over and over. 

Any time a magazine or a newspaper is talking to a fund manager youshould just assume the worst, even though more than 99 out of 100sourced interviews are without issue.  When you read a portfoliomanager in Business Week on Friday talk about a down and out stock,just assume they are Long & Wrong.  When you read about a hedgefund manager being quoted discussing the negatives of a public companyyou should assume the manager is either suing the company for damagesor is betting against the stock in some way.  There is a fine line thatis crossed regularly, and that fine line is rumor mongering.  If aportfolio manager, trader, analyst, or anyone is knowingly passing onfalse information to move a stock, then you have a case of rumormongering AND this is when fines come out or worse.  If a portfoliomanager is discussing only the negative and dismissing anythingpositive, it technically isn’t illegal and might not even fall underthe immoral category.  Did you ever meet that many people that enjoytalking up all the bad news in a position they are already losing moneyin?

S.E.C. DATA
Before completely outlining this, there areseveral excerpts taken from the SEC website that you can find if youtype in the phrase "Rumor Mongering" in the SEC site search function.

FromGretchen Morgenson’s August 27, 1999 NY Times piece titled "SEC ProbesShort-Selling Abuses by Day Traders": "The business of selling stocksshort is more highly regulated than the outright buying.because in theyears surrounding the 1929 market crash, groups of short sellers werefound to have harmed investors by forcing down the prices of certainstocks by the sheer force of excessive and unrelenting selling." If theSEC thinks it’s not still happening today, on a scale far greater andmore pernicious than ever, it is vastly, egregiously mistaken.

There is also news prior to the implementation of REG FD that discussed the fallout of rumor mongering on bulletin boards.

A1991 Congressional report (the House Committee on GovernmentOperations) on short selling:  The House Report made numerous findingsand recommendations, including that: (1) short selling plays animportant and constructive functional role in the equity market; (2)the uptick rule acts as a price stabilizing force and should beretained; (3) short sale regulation should be extended to the Nasdaqsystem; (4) many complaints about short selling are not soundly basedand may be the result of a poor understanding of short selling; (5) "apattern of abusive and destructive rumor mongering, targetedspecifically at companies in the equity securities of which someshort-selling investors have established major short positions,appear[ed] to be occurring;" (6) a large part of the problem withequity securities targeted by short sellers is the psychologicalmisperception that short sellers possess much greater manipulativepower than they really do; (7) a method for collecting dailyshort-selling activity and weekly short interest data frombroker-dealers should be developed and this information should beavailable electronically to the market in aggregate form; and (8)Congress should enact a reporting requirement for large individualshort positions.

WHAT THE NEW YORK POST DIDN’T SAY

At theend of the article the Post notes that a call to Cramer was notreturned.  They should have tried his hotel in Austin where they shouldhave known he would be.  I also do not see anywhere on this articlethat "The New York Post is a subsidiary of News Corp., and we areplanning to launch a competing broadcast financial news service thatwill competing for the same viewers as CNBC where Cramer is on daily."Yes they are sourcing the "Wall Street Confidential" video onTheStreet.com, but this is a clever way of attacking competition.There is also no mention that News Corp (NWS-NYSE) is regularlyreferred to as THE sensationalizer compared to other media. 

Noneof this is really the biggest secret in the world if you have beenaround the block.  Certain things are not legal and many issues areoutright a moral issue at best.  If you have followed Cramer or othermarket pundits you will know that this is not something new and notsomething that will disappear.  This is why investors have tounderstand the difference between news and noise and the true factsthat impact stocks.  Some rumors and some research becomeself-fulfilling prophecies, but discerning the noise from the news iswhat you have to do.

There may be more to this and the videomay create some calls into Cramer’s office that he’d rather not take,so you can’t just blow it off entirely.  But if this was a genuineissue, you would see more action in TheStreet.com (TSCM-NASDAQ) sharestoday.  TSCM is down only 1% at $11.87 and only traded 144,000 shares.

Jon C. Ogg
March 20, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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