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"For Funds, Cheating Became Business as Usual"

By James J. Cramer
09/03/2003 02:11 PM EDT


"It was a business. That's right, this illegal trading of mutual fund shares was a business for these mutual funds. It was a business to sell you out on behalf of others. It was a business that they knew was illegal, and yet they didn't care. They thought it was OK.

In fact, it's alleged that with Bank of America (BAC:NYSE - commentary - research), it was such a good business they installed a machine to make it easier for Canary Capital Partners to stiff you.


Let's go through the math. Say you own 1,000 shares in a Nasdaq mutual fund that closed at $100 at 4 p.m. After 4 p.m., Intel preannounces down, as it did in September 2000. You know that fund is going to open down at least 2 points. What would you have done to be able to get out at $100? Canary was able to sell your fund short at the $100 price. It then could cover the next day down two -- risk-free!

How do you get hurt? You obviously would have liked the right to sell at that price. But because you weren't a big enough customer, you couldn't.

Of course, the flip side is just as awful. If Intel preannounced to the upside, the hedge fund could have bought in at $100 and flipped at $102. That trader would get part of your profit because you owned less of that $100 price than you thought. He would be kiting part of your gain.

How could anyone in his right mind sanction this behavior?

How could anyone think it is a business, this setup that allows a big guy to win while a little guy loses?

Shameful.

And just unbelievable.

Random musings: In retrospect, I guess that, had I stayed in the business long enough, one of these firms might've approached me because it was a great, ongoing business for both the mutual funds and the hedge funds -- to hurt you."

(in www.realmoney.com)

"Funds Found Ill-Gotten Gains Irresistible"

By James J. Cramer
09/03/2003 01:36 PM EDT


"How does a hedge fund return 49.5% in 2000, 28.5% in 2001 and 15% in 2002 when the averages were hammered each year?

Pretty simple: It cheats! It cheats you. It cheats me.


And who let Canary Capital Partners cheat? Allegedly, Bank of America, Bank One, Strong and Janus.

Why would a fund let Canary make this money off you? Why would they let Canary get net asset values that you could never get?

Because of big fees from other assets.

Why wouldn't "timing police" at these firms have spotted it as they would have spotted you and me if we were trying to do this?

Easy; the cops probably were paid off to look the other way.

Yeah. Unbelievable.

I can't believe it myself. When New York State Attorney General Eliot Spitzer first told me he was looking into this, I told him, "Forget it." I said, "You are being set up by your enemies." I told him that no mutual fund would ever sell out its long-term shareholders so blatantly for a couple of bucks in fees from "sticky" money that the hedge funds deposited. (In the interest of full disclosure, Spitzer was an investor at Cramer Berkowitz, the hedge fund I founded.)

He told me I was a Pollyanna. He told me I was a Pollyanna, me, Mr. Paranoia, Mr. Conspiracy, Mr. Believe the Worst About This Business.

And boy, was he right.

How easy was it?

OK, let's say tonight, after the bell, Microsoft and Cisco were to preannounce to the upside. Would you expect the QQQs to open up a couple of percent?

Well, how about if I let you buy the QQQs at the closing price beforethe preannouncements. That's right, I'd let you buy the QQQs at $34, knowing that they most likely would open $2 up because of those preannouncements.


Outrageous?

Hardly; more like routine for Canary at the funds that helped it.


Or flip it. Say you know Intel and Dell will preannounce to the downside after the bell. How about selling the QQQs at $34? Money in the bank, right?

Again, that's what some firms did for Canary; it's alleged that Bank of America let Canary short its funds and cover the next day!

You could do the same thing with Japan. Say you know that Japan is going to rally off a big U.S. rally. How about being able to buy in on last night's Japan close, knowing it would be up huge on the back of the U.S. rally?

Canary got that too.

I didn't believe it. I didn't believe it until Canary admitted it and until I saw the emails, the emails from named inside executives such as Richard Garland, the CEO of Janus International, who in an email that has been released wrote "I have no interest in building a business around market timers but at the same time I do not want to turn away $10 million-$20 million. How big is the [Canary] deal ...?" Makes it look like once Garland heard how big it was, he okayed it pronto.

Shameless.

As a hedge fund manager, I sometimes dreamed that I had tomorrow's paper today. I dreamed that I knew where stocks were going to go out. I used to dream that I could buy at the price before the news.

Canary didn't just dream it. It did it. And you lost because of it. "

(in www.realmoney.com)