Cramer controversy: Did he manipulate market?

When I wrote the story about Jim Cramer two weeks ago, I had the feeling that it would not be the last time I mentioned him. However, I’m surprised how quickly Cramer provided me with controversy to criticize.

Cramer has recently gotten himself into trouble after he made comments that could be construed as a discussion of stock and market manipulation on a Wall Street Confidential video segment from

The video, which was released in late December, started to come under scrutiny when it was posted on YouTube.

Cramer’s comments finally came to public attention this week when an article about the incident was published in The New York Post.

In the Wall Street Confidential segment, Cramer seems to discuss methods he used to control the market.

He said, “You know, a lot of times when I was short at my hedge fund – when I was positioned short, meaning I needed it down – I would create a level of activity beforehand that could drive the futures. It doesn’t take much money.”

Cramer goes on to talk about what he would do if he owned stocks.

“Similarly, if I were long (owned stocks) and I wanted to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they’re higher. Maybe commit $5 million in capital and I could affect it. What you’re seeing now is maybe it’s probably a bigger market. Maybe you need $10 million in capital to knock the stuff down,” Cramer said. He goes on.

“But it’s a fun game, and it’s a lucrative game. You can move it up and then fade it – that often creates a very negative feel. So let’s say you take a longer term view intraday and you say, ‘Listen, I’m going to boost the futures and then when the real sellers come in – the real market comes in – they’re going to knock it down and that’s going to create a negative view.'”

But what is worse than Cramer talking about ways in which he may have controlled the market is what seems like a recommendation that hedge funds participate in this type of behavior.

“I would encourage anyone who’s in the hedge fund game to do it,” he said. “Because it’s legal. And it is a very quick way to make money. And very satisfying.”

While I personally think it may be debatable whether this tactic Cramer discusses is legal or whether it is market manipulation, I hope the Securities and Exchange Commission (SEC) investigates Cramer’s claims.

Henry Blodget of points out that illegal stock market manipulation, as defined by the SEC on its Web site, is “intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security . or rigging . trades to create a false or deceptive picture of the demand for a security.”

In the online segment, Cramer goes to talk about strategies to make individual stocks like Research in Motion (RIM) decline. He discusses spreading fear about the stock by calling reporters and newspapers.

“Get the Pisanis of the world and people talking about it as if there’s something wrong with RIM. Then you would call the Journal and you would get the bozo reporter on RIM and you would feed that Palm’s got a killer that it’s going to give away.”

At least Cramer admits that this type of activity is illegal. “Now, you can’t ‘foment.’ That’s a violation. You can’t create yourself an impression that a stock’s down.”

But then he adds, “But you do it anyway, because the SEC doesn’t understand it.”

I don’t think any hedge fund manager would ever want to talk about market manipulating behavior, whether illegal or not. The potential for controversy and scrutiny by the SEC should have been an appropriate deterrent.

Investors don’t like market manipulation and that fact alone should have kept Cramer quiet. The stock market is supposed to be a free market system in which money is invested efficiently in the most promising enterprises and the prices of companies reflect all internal information known about them. I have already told you that these two assumptions are not always true, especially in the short run.

But what exacerbates the problem is intentional market manipulation, where the traders and hedge funds use their large capital bases to control the direction of stocks and the market in the short run to make a quick profit.

This type of activity hurts small investors. They wonder why their stocks are going down for no conceivable reason and this creates panic, so they sell. If there’s one lesson to be learned from all this, it’s that you have to hold on through the volatility because it can just be a hedge fund playing games.

I don’t think Cramer should have made the comments. First, he seems to talk about controlling the market at his hedge fund. Second, he seems to advocate this type of behavior by hedge funds.

Some of you criticized me for being too harsh on Cramer in my last story about him. In this story, I tried to present the facts, provide you with a little commentary and give you my opinion. But I encourage you to make your own decision on Cramer.

Information from – Cramer vs. Cramer: “Will his crazy confession destroy his career?” Henry Blodget, from and partial transcript of Cramer’s comments from