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CNBC and the Price of Frankness
by Louis Corrigan
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 TheStreet.com, 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. |
