CNBC's Easy Money

BusinessWeek uncovers that the cable channel's own design flaw may be behind the investigation into its million-dollar stock-picking contest

by Tim Catts

Jim Kraber, the New York trader who alerted CNBC to suspicious trading in its stock-picking contest.

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In the past few months, Jim Kraber became more than a little obsessed with CNBC's "Million Dollar Portfolio Challenge." At the peak, the 42-year-old was spending 12 hours a day on the contest, using three computers in his Greenwich Village apartment to trade 1,600 different portfolios, all in an effort to win the $1 million grand prize. He even dropped his studies for the chartered financial analyst (CFA) exam, given once a year, so he could have more time for the financial news channel's game.

He made it into the group of 20 finalists, but in mid-May, as the last round of trading opened, he noticed an unusual pattern in the picks of other contestants. One trader had a stream of near-perfect picks, consistently placing huge bets on shares that soared in after-hours trading. Kraber suspected the trader and perhaps others were getting help from someone who was changing their picks after the stocks' increases—and he quickly notified CNBC. "I went back and looked at his trades and thought, 'This is pretty much statistically impossible,'" says Kraber, who holds master's degrees in business and statistics from New York University.

Kraber says CNBC rebuffed him at the time, but now it looks like he may have been right. Several contest participants have told BusinessWeek that there was a flaw in the design of the CNBC game that allowed certain players an unfair advantage. As many as four of the top contestants in the million-dollar contest may have exploited the flaw, according to the participants interviewed by BusinessWeek. On May 30, two weeks after Kraber says he notified the cable channel, CNBC posted a notice on its Web site that there have been allegations of trading strategies "in violation of the contest rules" and that it is investigating the issue. It has not disclosed the nature of the alleged problems.

"An Aggressive Investigation"

For what is essentially the American Idol of stock picking, the stakes are sky-high. A million dollars is on the line for the ultimate winner of the contest, along with fame and future opportunity. CNBC, which bills itself as the essential news channel for investors and businesspeople, has a reputation to protect. With constant promotion from channel anchors like Becky Quick and Joe Kernen, the contest attracted 375,000 participants and nearly tripled the traffic to CNBC's Web site. Now, the channel, which is part of General Electric (GE), may have to publicly acknowledge mismanagement of the contest and could face potential lawsuits from disgruntled participants.

"I figured out very quickly what was going on—and they were looking at all the trades," says Kraber. "It's not negligence that they might have made bad software. It's negligence if they knew this was going on and did nothing to stop it."

CNBC declined to comment specifically on Kraber's allegations. A spokesman for the cable channel says, "Once these issues were raised, we launched an aggressive investigation immediately. The integrity of the contest is very important to us." CNBC, run by President Mark Hoffman, has been a money machine for GE, even as NBC overall has struggled (see BusinessWeek.com, 2/5/07, "Jeff Zucker Takes Charge at NBC Universal").

Too Good to Be True?

The performance of some participants does look unbelievable, literally unbelievable. Over the first nine trading days of the final round, the top five stock pickers tallied average returns of 45%, according to a BusinessWeek review of their trading portfolios. If that kind of performance was stretched out over a year, it would work out to an annual return of more than 1,200%. "Obviously if you have knowledge of what's happening with the stock, that would really skew the results," says Lubos Pastor, a professor of finance at the University of Chicago, who is speaking generally and has not studied the trading in the CNBC contest.