A FATUOUS FUROR

By JOSEPH NOCERA

Last week's dustup over the personal finance column James J. Cramer writes for SmartMoney magazine is one of those "scandals" only a journalist could love: incredibly easy to toss off allegations of "conflict of interest" yet incredibly difficult to define concretely what, exactly, the conflict is. At the heart of it, though, lies the ludicrous notion that only journalists are pure enough to offer financial advice untainted by "conflict." Woe unto us all.

Cramer is a hedge-fund manager who for years has written a no-holds-barred financial column for a succession of magazines, most recently the two-year-old SmartMoney. The purpose of the column has always been to tap Cramer's knowledge as a stock trader for the benefit of his readers. Always, he gives concrete examples culled from his own portfolio to buttress his points; always, that fact is disclosed.

But his reputation for honesty took a beating after the Washington Post disclosed that in the wake of his February column-devoted to why Cramer favored thinly traded "orphan stocks"-three out of the four real-life examples he cited saw a huge run-up in both price and volume. Cramer's fund, which held as much as 9% of two of the orphans, was temporarily up $2.5 million in just those four stocks. As a result, Cramer was accused of using his column as a means to generate profits. Charles Jaffe, the personal-finance columnist for the Boston Globe, howled sanctimoniously that Cramer's "shenanigans" were "the kind of thing that jeopardizes the credibility of everyone who writes about investments." Cramer has been particularly hammered because he continued to buy at least one of his favored stocks after he wrote about them-but before the article was published. This led to the accusation that he was in effect buying in advance of the news he himself was about to create. Cramer concedes that he bought stock during that time period; a large block became available, and he felt he had no choice but to purchase it. He is, after all, a trader first, with a responsibility to his clients. He also disclosed in the column that he held the stocks and even cautioned readers against buying them if they started to shoot up.

More tellingly, if Cramer were really trying to use his column to manipulate the stocks' prices, he would have sold them during the run-up and taken the quick profit. That this happens virtually every day is an open secret: anonymous fund managers leak dubious takeover rumors to favored reporters and then sell the stock as soon as the "news" becomes public. That's the real scandal. Cramer not only didn't do that, he is one of the few on Wall Street to have exposed this practice in his column. The value of Cramer's column lies precisely in the fact that its author is a professional trader, not a professional journalist. The fact that he has his own firm's money at risk gives his work a credibility that is largely absent from the bland and scattershot advice so often parceled out by the personal-finance fraternity. And the fact that Cramer actually works on Wall Street gives him insights into how the Street functions that no one who merely writes about it can acquire. We're lucky he is willing to tell us as much as he does about what really goes on behind Wall Street's closed doors. Ultimately, we don't need less of what Cramer does, we need more of it. It may be a stretch to say that personal-finance journalism is too important to be left to journalists, but if as a result of this fracas Cramer winds up being drummed out of the column-writing business, the loss will be ours, not his.

Joseph Nocera is the author of A Piece of the Action.