Cramer Comments Hurt Self, Image of Hedge Funds

Given Cramer's popularity, as well as his image as an advocate for the individual investor, the comments have prompted a wide range of response from various news outlets including the New York Times, USA Today and the New York Post.

(In the interest of full disclosure, let me point out that I once wrote for TheStreet.com (TSCM), co-founded by Cramer, and have previously been involved in litigation with Cramer and TheStreet.com, both as a plaintiff and a defendant. TheStreet.com is a competitor of SmartMoney.com.)

What has seemed to generate the most controversy were his remarks about attempting to manipulate stocks by aggressive buying and selling. In the interview, Cramer said:

"A lot of times when I was short at my hedge fund, and 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. Or if I were long and I would want to make things a little bit rosy, I would go in and take a bunch of stocks and make sure they are higher — maybe commit $5 million in capital and I could affect it."

Later in the broadcast, he described specifically how he would go about affecting a particular stock, namely Research in Motion (RIMM):

"If I wanted it to go higher, I would take and bid, take and bid, take and bid, and if I wanted it to go lower, I'd hit and offer, hit and offer, hit and offer. And I could get a stock like RIMM for maybe — that might cost me $15 to $20 million to knock RIMM down — but it would be fabulous, because it would beleaguer all the moron longs who are also keying on Research in Motion."

While these statements sparked significant outrage, Cramer is essentially describing aggressively bidding or offering stock in an attempt to move the market in the direction he wished it to go. And while I'm not a legal scholar, I personally find nothing wrong with what he describes here as it appears to be legitimate buying and selling. Free trade is a voluntary agreement between two parties. If Cramer was aggressively buying, then someone else was a willing seller.

In that sense, we all "manipulate" the market simply by being a part of it. And you don't need $15 million to $20 million to make a stock move. There are literally hundreds of low-float microcap stocks that anybody with a few thousands dollars and an Ameritrade account can jump.

Do you want to manipulate a stock? Go find a name with a $10 million market cap that trades fewer than a couple thousand shares a day. Put in an order to buy a few thousand dollars at the market and I'll guarantee you'll push it 5% to 10% higher. Or, perhaps even more effectively, simultaneously give both market orders as well as preplaced buy-stop orders to a few different brokers and you'll likely be able to push it even higher. From where I stand, there's nothing illegal in buying or selling a stock aggressively, even if it does move the price higher.

But nobody is bigger than the market. In trying to bully a stock up, one usually succeeds only in sinking a large chunk of money into a name at artificially high prices. After your heavy buying is done, what inevitably ends up happening is that you attempt to dump the shares and the stock quickly falls back to near or even below your purchase price. This is as true playing with $5,000 as it is with $5 million or even $500 million.

The nefarious conduct comes, in my opinion, when one crosses the line into deliberately spreading falsehoods either to reporters or the public at large in an attempt to push the market a certain way.