Behind CNBC's easy money

It's one thing to be a good stock picker, but annual returns of 1,200 percent? That's just too ridiculous to be believed - and indeed it's turning out that way, thanks to a design flaw in CNBC's "Million Dollar Portfolio Challenge." The cable channel hasn't been saying much since the scandal broke, but Business Week appears to have uncovered the trick. Actually, it's pretty simple: Traders were able to go onto CNBC's Web site before the close of regular trading at 1 p.m., select a number of stocks they wanted to buy, and, leaving their browsers open, hold off on executing those trades for hours. When the trades were finally executed, they were still listed at that 1 p.m. closing price. Well, you can imagine the possibilities if a stock jumps in after-hours trading (say after earnings come out) and you get to buy at the lower, closing price. Making it even more enticing, traders were able to select as many as 50 stocks at 1 p.m. and then execute trades for only the one or two best performers.

Serge Amelyan, a real estate investor from Mequon, Wis., was one of the 20 finalists with prescient trades. On the first day of the final round, he placed a big bet on Mindray Medical International (MR), which was reporting earnings that afternoon. Amelyan cashed in as the stock rose 7% in after-hours trading, more than any other stock with a late earnings announcement. The very next day, he invested heavily in Compuware (CPWR), which again reported strong earnings and surged 7%. In all, seven of the nine stocks Amelyan invested in during the finals announced earnings after the markets closed. Six of those saw sharp increases, while one had a slight decline. Amelyan says he didn't use any unusual trading practices. "I didn't play that way," he says.

Much of the BW piece focuses on 42-year-old Jim Kraber, who was spending 12 hours a day on the contest, using three computers in his Greenwich Village apartment to trade 1,600 different portfolios (hey, a million bucks is a million bucks).

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.