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Thursday, December 17, 1998

An Investment Opinion
by Louis Corrigan

CNBC and the Price of Frankness

Will frankness get you in trouble? Apparently. The powers that be at CNBC decided yesterday that, until further notice, James Cramer, a hedge fund manager and co-founder of, would be barred from making his biweekly appearance as a guest analyst on the network's Squawk Box program. Under normal circumstances, I'd say that's their prerogative. It's their show, and he has no contract. However, this decision implicitly comes with the allegation that Cramer may have engaged in unethical behavior. And that would mean that Cramer is simply lying, which I don't believe. So it appears that what's really at stake is whether CNBC is willing to cave in to outside pressure, including pressure from a company, when a guest analyst speaks his mind. The issue, then, is not Cramer's integrity but the network's integrity, and that's of considerable interest to all investors who rely on CNBC as a source of financial news.

The controversy turns on comments Cramer made regarding WavePhore Inc. (Nasdaq: WAVO) during the December 2 broadcast. That company's stock had soared $7 1/2 to $15 1/4 the day before on volume of 32 million shares after it had announced plans for a new online shopping area available through its WaveTop Internet broadcast service. As is often the case with such moonshots, the company's CEO, David Deeds, was scheduled to appear on Squawk the next day.

Cramer led off the program by telling a story. He said he had contacted the stock loan department at Goldman Sachs that morning and said, "Listen, I want to short twenty-five thousand WavePhore because I think this thing is a big speculative bubble." Goldman said, "Not on your life. It can't be borrowed." Cramer then launched into an explanation of how short squeezes work and why, in his view, WavePhore's run-up was "not a fundamental move" and that speculators involved in the stock were "playing with fire."

Somewhere in the mix, though not in the transcript CNBC sent me (I saw it live), Cramer said he had no position in WavePhore; he talked generally about "Fraud-U-Nets," companies that are Internet wannabes; and he said that Federal Reserve Chair Alan Greenspan "doesn't like WavePhore going up." Shortly thereafter, anchors Joe Kernen and David Faber conducted a hard-hitting interview with Deeds, who said the company hoped to turn a profit by the end of '99 but might need to raise more cash during the first half of next year. Cramer asked whether Deeds had plans to sell stock. Deeds responded, not at this price, "I think it's undervalued now."

That day, WavePhore's shares plunged 38% to close at $9 1/2. The next day, the company issued a press release saying it had asked the SEC and Nasdaq to "investigate these events to determine whether applicable laws and regulations have been violated." The company said Nasdaq was reviewing the matter. Neither the SEC nor the Nasdaq has said a peep since. Cramer has said publicly, and told me privately, "I had no intention of shorting WAVO. I just wanted to demonstrate that it could not be borrowed and was therefore subject to a short squeeze." In other words, he had just done his homework to make sure that what he sensed was the truth, and what he planned to say on the air, was in fact accurate.

CNBC spokesperson George Jamison told me yesterday that the network has no reason to believe that Cramer violated any of CNBC's disclosure policies. He said the network expects its guests to act with objectivity and professionalism, and, given a number of negative responses from viewers, CNBC simply needed more time to evaluate what happened. Jamison suggested that the way Cramer expressed his views may have created unnecessary confusion. He said the network is also reviewing its own standards.

That, at any rate, is the gist of what Jamison said. I was so steamed about the controversy that my interview notes are a bit incomplete. Did Cramer short the stock? He says no. Is it unethical to talk badly about a company on CNBC? No, no more than it's unethical to speak well of a company. So where's the problem?

Let's take it a step further. What if Cramer had said, "I called Goldman and shorted 25,000 shares this morning because I think this stock is garbage." Considering that money managers get on CNBC all day long and talk their positions (with CNBC's knowledge, I have no doubt), what's wrong with a short-seller coming on and talking his position while also disclosing it very publicly? Nothing. Indeed, when you think about it, the only guy on CNBC that morning with a position in WavePhore was Deeds, and he didn't hesitate to tout it.

The Motley Fool doesn't see eye to eye with Cramer when it comes to investing. We think that for most people, buy-and-hold works best, and academic evidence supports that view. Cramer has some long-term investments, but he's also a very active trader. Yet, since he beat the S&P 500 index every year between 1988 and 1996 (we don't know his record the last two years), he's got a track record that makes him worth listening to even if you don't agree with his approach. Moreover, despite our differences, we're both in the business of educating investors. Going on CNBC and trying to explain to investors why there have been such amazing spikes in third-tier Internet stocks is fine by me. If they stuck me on the show, I'd say the same thing, just with a lot less flair. I consider it a public service, and one that CNBC's Squawk Box audience particularly needs to hear.

Is WavePhore really in the "Fraud-U-Net" camp? I haven't looked at it closely, so I can't say. But it's worth putting Cramer's comments in context. CNBC was at least partly responsible for WavePhore's rise in the first place. By Joe Kernen's own admission, WavePhore was "up a point or two" on "a million and a half shares" on December 1 before he mentioned it on one of his Stocks to Watch features. "[N]ext thing you know, the stock soared another 60 percent and the volume surged from about two million to over 32 million shares," Kernen told viewers. Drawing linear cause and effect conclusions from that may misrepresent the story, but maybe not much.

Jamison told me that this controversy is not a big issue and that Cramer could be back soon. If that's really the case then that's great because I think Cramer's one of the only members of Wall Street's Wise that holds himself aggressively and Foolishly accountable for what he says. Considering how much he says, that's quite an accomplishment. While CNBC has itself done a progressively better job of disclosing its guests' financial interests and holding them accountable for their track records, hopefully this controversy will lead the network to adopt an even more proactive stance. CNBC's first step should be apologizing to Cramer for causing him embarrassment. He's a big boy, but it can't be a pleasant experience to have Dow Jones report that you may have acted unethically. CNBC's second step should be apologizing to viewers for even hinting that guests should offer something less than their colorful, candid opinion. It simply sets a dangerous precedent if a company can rattle some swords and intimidate or even silence an honest critic.

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