Jim Cramer Did Something Wrong. I am Shocked! Shocked!

Watching Jim Cramer getting his ass kicked by Jon Stewart last night left me with mixed feelings, but mostly feelings of deja vu. I mean, is anyone really surprised by any of this?

It is nothing new that Cramer engaged in sleazy tactics when he ran a hedge fund. Hell, that was known years ago, and was admitted in his 2002 book Confessions of a Street Addict and one by a former employer, Nicholas Maier, Trading With the Enemy. It's also a matter of public record that as a fund manager he was the subject of an SEC inquiry, later dropped.

I reviewed both books for Business Week, and the title of my review, in BW question-y style, was "Brilliant Stockpicker--or Brazen Hustler?" and it was obvious from my review that I leaned heavily toward the latter. I had no choice--Cramer was very forthright on the subject. I wrote:

He then opened a hedge fund, Cramer Partners, where he developed a special approach to earning money. He describes this method with such candor that some readers may be taken aback. After all, controversy is now swirling around analysts. And they were at the core of Cramer's "formula for making money every single day, day in and day out." As developed in the early '90s, the system consisted of becoming "merchants of the buzz." Cramer writes: "We would work to get upgrades or downgrades because we knew, cynically, that Wall Street was simply a promotion machine."

Cramer would look for stocks likely to move quickly on good news. Then one of his staffers would begin calling the companies, looking "to find anything good we could say about them." When he discovered a stock that seemed ready to take off, or when his staff uncovered something favorable about the company that the analyst community didn't know, Cramer would load up on options and stock and then "give the good news to our favorite analysts who liked the stock so they could go do their promotion." That would get the buzz going, and "we would then be able to liquidate the position into the buzz for a handsome profit."

In other words, Cramer used his pals in the analyst community to engage in a kind of legal pump-and-dump scheme. Part of what makes his account compelling is that Cramer is so matter-of-fact, even proud. He sees absolutely nothing wrong or unfair about the practice. In fact, at one point he says that he sees himself as "the proverbial Boy Scout, never breaking any laws, never even getting a parking ticket," a man who had "nightmares about overdue library books. I was Little Miss Goody Two-shoes." Nope, introspection is not his strong point. [emphasis added]

Maier had accused Cramer of frontrunning short positions. That turned out to be wrong, and his book was withdrawn from circulation, pulped, and a new edition released.

But the publisher's retraction was not quite as sweeping as Cramer might have liked. HarperCollins says the only inaccuracy was the specific reference to Western Digital, which the new version of Maier's book doesn't mention. But the revised book does say that Cramer was the subject of an SEC inquiry, later dropped, concerning trading in options of an unspecified stock. "Our timing on this occasion may have been too perfect," Maier says in the post-pulping version. A call to Cramer was referred to his lawyer, who says both versions are inaccurate, and that there was no SEC inquiry at all.

So I guess I can't quite figure out why people, Stewart and his researchers included, are surprised by Cramer's sleaziness, since he admitted it himself in his book. As a matter of fact, watching Cramer's awful performance last night, I couldn't understand why he didn't admit that he came clean (more or less) in a book he'd written nine years ago.

I have only limited sympathy for people who buy stocks based on what Cramer or any other market guru has said. A financial genius named Burton Malkiel has been arguing against the very concept of stock picking for years, and wrote a book called A Random Walk Down Wall Street which became a best-seller.

Three years ago I made my own modest contribution to the genre in Wall Street Versus America, whose central point was that you had to listen to Malkiel and disregard the Cramers of this world. I also dwelled at length on the crookedness of Wall Street firms, particularly Bear Stearns.

I pleaded with people to avoid managed mutual funds, hedge funds and individual stocks, to buy stock indexes and disregard stock newsletters and market "wizards" like Cramer. As I argued in the book, there is no way to beat the markets, no way of getting rich unless everyone in the market is getting rich (and no way of escaping getting poor if the market goes into a slump).

Cramer has nothing to be ashamed of that he's hustled his way to a fortune, pushing a dream of riches that countless studies have shown to be illusory, since markets are reasonably efficient. But you can't get rich being a Cassandra, and the best way to make money is to lie that you can make money for other people. Cramer knows that as well as anyone, and now he is paying the price.

© 2009 Gary Weiss. All rights reserved.