Who was the Wolf of Wall Street Jordan Belfort?
A dentist who went rogue. A meat salesperson who went bust. A stockbroker who became a boiler room boss. Belfort's career in a nutshell.
His entrepreneurial career started at a very young age when he made $ 20,000 from selling ice cream on the beaches of Queens. Instead of pursuing his ice cream career further, Belfort opted to study dentistry. A honorable, profitable profession that he abandoned after merely one day upon hearing that being a dentist is not the key to quick and massive wealth.
Once a salesperson, always a salesperson. He therefore returned to what had already proved to be very lucrative - sales. This time: seafood and meat. Whereas his first endeavor into the world of business was a success, the second time saw him on the other end of greatness. Belfort declared bankruptcy and turned to investment banking with L.F. Rothschild, a now defunct, investment bank. You start seeing a bit of a pattern here.
Belfort didn't last very long at the bank and, after being made redundant, started his own business, Stratton Oakmont, a boiler room, pump and dump firm that “specialized” in getting inexperienced individuals to put their hard-earned cash into penny stocks. With Stratton Oakmont began his money-making scheme that led to the lavish lifestyle that attracted Hollywood to portray Belfort's life in the movie Wolf of Wall Street.
How did Jordan Belfort pull of his scheme?
At its peak, Stratton Oakmont had a revenue of $ 3,000,000,000 and 1,378 employees. Before digging into their scheme, it is noteworthy that Stratton Oakmont was not all about enriching themselves through pump and dump schemes*. The brokerage firm also conducted some legitimate business. It was involved in 35 initial public offerings including the shoe and fashion company Steve Madden. This was the legitimate part of their business. They also acted as market makers, a fully legitimate and important aspect of trading stocks and other assets. There was just one problem: all their trading took place over-the-counter, that is merely between two parties and not on an official exchange such as the NYSE and without any price verification or order book**. The firm was therefore in full control over the prices of the stocks it was buying and selling for its clients. It sometimes even refused certain trades in order to manipulate a stock's price. When, for instance, a large sell order came in, the firm would refuse to realize the order to keep the price artificially inflated.
The second part of their “business” was the aforementioned pump and dump schemes that allowed them to pocket huge sums from pumping the price of a share before offloading their holdings and leaving those who had bought on their advice with substantial losses.
Whilst their clients were left out of pocket, Belfort and his people would enjoy the artificially created gains. The fortunes they amassed enabled Belfort and his employees to enjoy lavish, drug-fueled parties, extravagant holidays, and are paradisaic lifestyle. For Belfort, the fortunes he made on the back of others allowed him to become the proud owner of a yacht that was once owned by one of the greatest fashion icons, the designer of the little black dress, the great Coco Chanel.
Even though Belfort and his employees at Stratton Oakmont enjoyed their seemingly never-ending money stream, their activities did not go unnoticed. The National Association of Security Dealers kept a close watch on Jordan Brentfort and Stratton Oakmont for most of its existence. Their observations eventually led to the firm's expulsion in December 1996. This disbarred the firm from conducting any further financial transactions and marked the end for the company. The company went defunct the same month.
Who were the victims?
A long list of small savers who fell for his fraud. There are no big names such as in the case of Bernie Madoff, Enron,McKinsey, Societe Generale, Martha Stewart, the Queen, or Rudy Kurniawan. However, the high number of victims that were defrauded is simply shocking: 1,513 individuals who lost $ 200 million. Most of these were inexperienced people who entrusted Belfort with their hard-earned savings, the elderly, and individuals who had little to no contact to the world of finance. Easy prey.
Belfort and his associates admitted to seven years of manipulating the price of more than 34 companies and money laundering in 1999. In exchange for Belfort's cooperation with the authorities and his guilty plea deal, he was sentenced to four years in prison and restitution of $ 110 million to be paid to the clients that he had scammed. Only about one tenth, around $ 10 million were ever repaid.
He spent twenty-two months of his sentence in a minimum security prison in California and while incarcerated wrote the book that was to become the basis for the box office hit The Wolf of Wall Street. The movie deal earned him approximately $ 1.2 million in addition to the royalties from his book sales. His book contract alone paid him a $ 500,000 advance.
*Explanation of pump and dump schemes: In case you are unfamiliar with pump and dump schemes: it is the practice of artificially inflating a stock's price through generally baseless positive facts. For instance, a little corner shop might be hyped to be on the brink of opening 5,000 new stores in the next months. The news is so fresh off the press that only a few insiders know of the opportunities. Obviously none of that would be true in a pump and dump scheme. The corner shop is simply a corner shop, the rest is made up.
Once the price has increased enough the individual or collective pumping the price of the stock will dump – sell – their holdings to make a profit on the back of gullible investors. As a consequence, the stock price generally plummets leaving most out of pocket and only enriches those who have pumped the stock's price or you were quick enough to sell their holdings in time before the dump. For the most part, pump and dump schemes will use penny stocks, as their prices, due to a low market cap, can be easily manipulated.
** In case you are not familiar with order books: an order book shows all sell and buy orders for a particular stock, the quantity of stocks for sale or sought, and the price for which each party – seller and buyer – is willing to trade a particular stock. E.g.,:
Imagine you wanted to buy shares in the oil giant TOTAL. You can look at the order book to get a sense of which direction the price is heading.
Time Bid (Buyer's offer) Volume Ask (Seller's offer) Volume
10:00:01 € 39.01 15 € 39.15 8
10:00:03 € 39.19 107 € 39.21 105
10:00:05 € 40.01 430 € 40.03 500