Jim Cramer – Lenny Dykstra Stock Scandal, Reports Randall Lane's The Zeroes

The stock guru's top pupil, baseball star Lenny Dykstra, was secretly paid to plug stocks on TheStreet.com and give access to Cramer, reveals Randall Lane in his new book, The Zeroes.

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In an era of epically wrong financial predictions, boisterous Jim Cramer's declaration that "Bear Stearns is not in trouble!" a week before its March 2008 collapse, rated among the most moronic, or at least the most infamous.

But it turns out that Cramer made one call far worse: He decided to make a stock-picking star out of a mumbling former Major League Baseball All-Star named Lenny Dykstra, giving him a high-profile column and ultimately an expensive "premium" newsletter on Cramer's site TheStreet.com. How did Dykstra return the favor? As I reveal in my book, The Zeroes: My Misadventures in the Decade Wall Street Went Insane, Dykstra took money—$250,000 worth of secretly issued stock—in exchange for recommending that stock to TheStreet.com subscribers. He also promised access to Cramer in exchange for the stock, which he apparently hid under his brother-in-law's name.

It was Cramer's repeated endorsements—echoed by de facto validation from everyone from CNBC to me—that enabled Dykstra to pull off the scheme.

Jim Cramer single-handedly created the concept of Dykstra-as-financial genius. Known mostly for his willingness to crash his body into walls or his cars into trees (nickname: "Nails"), the former New York Met and Philadelphia Phillie became an investment columnist for TheStreet.com in 2005, after sending Cramer an unsolicited email. For the next four years, Dykstra made stock picks, focusing on "deep-in-the-money calls"—a way to buy leveraged options—for tens of thousands of followers on Cramer's website.

Dykstra confuses HBO's Bernard Goldberg, but impresses Jim Cramer

"Not only is he sophisticated, he is one of the great ones in this business," Cramer told HBO's Real Sports in 2008. "He is the one of the great ones... a guy who applied the same skills to money that he applied to sports, it's brilliant." Cramer added that there are only "four or five" people in the world he would take stock picks from—and Dykstra was one of them.

Cramer, I am sure, had no knowledge of Dykstra's "pay to plug" scheme—an arrangement that could well lead to a Securities & Exchange Commission investigation. He was just a dupe. But his relentless endorsements and promotion of the ballplayer's stock-picking over the years must now surely rank as his most ill-conceived.

Cramer's effusive blessing, and the fact that his highly legitimate TheStreet.com tallied Dykstra's impressive track record (as late as last year, Dykstra bragged on the site that he had picked 96 winners against only one loss) impressed everyone from CNBC to The New Yorker. It also, for a time, impressed me.

I was running a company I had co-founded: Doubledown Media, which produced glossy magazines like Trader Monthly, Dealmaker, Private Air, and other titles for the rich and profligate.

Lenny Dykstra called me in 2007 as randomly as he had called Cramer, and within 24 hours he hired me to produce The Players Club, a financial advice magazine for professional athletes. Dykstra introduced me to his athlete buddies, everyone from John McEnroe to Tim Brown to Keith Hernandez. But he was especially proud of his friendship with Cramer, a relationship he waved around like a magic cloak of legitimacy. He'd play me Cramer's voicemail messages, or forward me their emails back-and-forth.

Given that hundreds of people were already slavishly emulating Dykstra's picks—and given how good his track record was, at least according to TheStreet.com—I suggested that he start a paid financial newsletter, an opportunity he jumped at. For six months, we developed the name, hired staff, and tested the price ($995 per year). Some $87,000 in subscription money rolled in before Dykstra even wrote his first newsletter.

And then, in April 2008, he abruptly took the newsletter from us and put it under TheStreet.com's umbrella. Helped by the marketing muscle of TheStreet.com, Dykstra quickly sold roughly $1 million in newsletter subscriptions.

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Dykstra also left us with hundreds of thousands in unpaid bills for the magazine we were publishing for him. In the course of our ensuing legal fight—and then doing reporting for my book The Zeroes—I stumbled across his Cramer-for-sale scheme.

In the late winter of 2008, an entrepreneur named Richard O'Connor, who had become Dykstra's favored adviser, introduced him to Shannon Illingworth, the founder of a publicly traded company called Automated Vending Technologies, or AVT, and the two quickly cut a deal. O'Connor told me that on March 25, 2008, Illingworth gave Dykstra roughly $250,000 worth of AVT stock in exchange for plugging the company on Cramer's website, TheStreet.com, and promising to provide a personal introduction to Cramer.

This is page two of the article. To read from the beginning, click here.

O'Connor claims that Dykstra told him he knew the pay-to-plug arrangement was illegal. To avoid getting caught, O'Connor says, the former All-Star baseball player had a solution: "We can just put the stock in Keith's name," referring to his brother-in-law, Keith Peel.

And so it was done. O'Connor provided me copies of stock certificates showing that on March 25, 2008, Keith Peel was issued 250,000 shares of AVT stock, which traded at roughly $1 a share. "Keith didn't know anything about it," says O'Connor, maintaining that using Peel's name was a way to stash the stock away from potential regulatory oversight. The shares were held at Dykstra's mansion, which is where O'Connor retrieved them.

Just two weeks later, on June 6, 2008, Dykstra offered his premium subscribers a curious "bonus" recommendation: a plain old penny stock named AVT, "which gives investors a lot of potential upside." Dykstra droned on endlessly about the stock, with all the conviction of a prisoner of war extolling the cause of his captors for the cameras.

When I contacted him shortly before The Zeroes printed, AVT founder Illingworth admitted that he hired Dykstra as a consultant for his "relationships with TheStreet.com, Cramer," and that the idea for Dykstra to tout his company's stock was "mutual." (Despite the certificates, Illingworth denied ever giving Dykstra or Peel $250,000 worth of stock; instead he claims the only money he gave to Dykstra was $15,000 to trade on his behalf, a sum that disappeared.)

O'Connor claims that Illingworth was angry that he didn't get more plugs from Dykstra, or a meeting with Cramer. O'Connor also says while advising Dykstra in the first half of 2008, he saw multiple other offers from small company CEOs offering Dykstra cash in exchange for access to Cramer, though he does not know if Dykstra ever cashed in on those opportunities.

Dykstra, of course, was never a market genius. When researching our lawsuit against him (he eventually agreed to pay $200,000—but later defaulted), I uncovered emails from a stock-market analyst named Richard Suttmeier, who sent Dykstra a list of "deep-in-the-money" call picks each morning. Most of "Dykstra's" picks came from this list. Several bloggers also figured out how these picks performed so phenomenally: He counted his winners, but endlessly rolled over his losers, in tallying his overall results.

Yet even after I raised the Suttmeier picks in our lawsuit against him, and even after O'Connor told me in 2008 how he had called Cramer's office trying to intervene, Cramer allowed Dykstra to keep writing for his website, and continued to help him sell his newsletter, for almost a year. It wasn't until April 2009 that Cramer finally dumped him.

I reached out to Cramer while I was writing The Zeroes—using a personal email address that Dykstra supplied me—but he did not respond. As noted above, I'm sure he had no idea that Dykstra was selling both access to him and the audience at his otherwise-excellent website.

But it was Cramer's repeated endorsements—echoed by de facto validation from everyone from CNBC to me—that enabled Dykstra to pull off the entire scheme. Dykstra has now filed for personal bankruptcy, and last year admitted to living in his car. Based on what I detail in my book, AVT could potentially face an SEC investigation into these shenanigans. Cramer, meanwhile, continues to draw hundreds of thousands of followers, via his CNBC show Mad Money—one of the few in the industry who managed to escape the past decade unscathed.

Randall Lane is editor-at-large at The Daily Beast. The former editor in chief of Trader Monthly, Dealmaker, and P.O.V. Magazines, and the former Washington bureau chief of Forbes, he is the author of The Zeroes: My Misadventures in the Decade Wall Street Went Insane.