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Masters of Fraud: The Wolf of Wall Street

Masters of Fraud The Wolf on Wall StreetNext in our Masters of Fraud series is Jordan Belfort. While he may not be a household name, his notorious moniker, ‘The Wolf of Wall Street’ is becoming just that. The 2013 blockbuster movie, starring celebrity Leonardo DiCaprio, tells the story of an aspiring young Wall Street broker who turns out to be a hustler and a crook. Belfort defrauded hundreds of clients to the tune of $200 million through the brokerage firm he founded, Stratton Oakmont, using so-called ‘boiler room’ tactics and pump-and-dump schemes.1

Belfort defrauded hundreds of clients to the tune of $200 million through the brokerage firm he founded, Stratton Oakmont.

Background on Master of Fraud Jordan Belfort

Belfort grew up in a Jewish household in Queens, NY. Hustling at an early age, he used to sell ice Italian ices out of a styrofoam cooler to people along the beach.2 After college, Belfort gained further sales experience, not interning on Wall Street, but selling frozen lobsters door to door.3 Eventually, he decided to try his hand in finance and began as a trainee stock broker at the firm L.F. Rothschild.4 After being laid off and with little experience, he went on to boldly found Stratton Oakmont. This is when he soon got into serious trouble and started defrauding clients.

The Fraud

While the movie doesn’t get into the specifics of the con, here is a Wall Street Journal account of what took place. Stratton Oakmont’s ‘investment banking division would underwrite an IPO (initial public offering) for a company that didn’t really exist. Apparently, it was more about the ‘story’ of that company than the actual company that intrigued the firm.

A normal IPO would have its shares sold to the public. In one of Stratton’s IPOs, the shares were all sold to its own customers at $4 per share, for example. These clients immediately flipped (sold) these shares back to Stratton at $4.25, which made some of them profits into the thousands of dollars, at first.4 This engendered the client’s confidence. The next deal wouldn’t work out as well for them.

A normal IPO would have its shares sold to the public. In one of Stratton’s IPOs, the shares were all sold to its own customers at $4 per share, for example. These clients immediately flipped (sold) these shares back to Stratton at $4.25, which made some of them profits into the thousands of dollars, at first.4 This engendered the client’s confidence. The next deal wouldn’t work out as well for them.

Stratton clients would soon get another call about a very ‘hot’ IPO that was supposed to price at $4 per share and rocket up in value. Clients would wire over money in anticipation of another, even bigger hit. At the last minute, the salesman would tell the client that the deal was so oversubscribed (demand in excess of the number of shares being offered) that they were likely to only get an extremely small allocation of stock on the deal (at the low $4 level). But they could buy the rest they were planning on right after the stock opens for trading.5 The client wouldn’t expect the price to change that much and entered thousands of buy orders at the open.

Once the Stratton IPO opened, it would be artificially manipulated higher by the Stratton, since they still held virtually all the stock. It would move up in increments all the way to $12, which is when they would execute all their customers buy orders. Except it was Stratton Oakmont that was actually selling the clients their stock up at $12.6 This was the late-1990’s when IPOs were screaming higher so this wasn’t as outrageous as it may seem.

Soon after Stratton sold all the ‘stock’ to the clients at $12, there were no more buyers for this stock and the price collapsed. Stratton Oakmont had sold fictitious stock to clients at $12 that was worth nothing.7 Stratton Oakmont pocketed the funds and would move onto the next deal, often with brand new customers.

The Lifestyle

Many of the escapades of Belfort and his co-workers are in the movie ‘The Wolf of Wall Street’. If you haven’t seen the movie, Belfort reveals some of the tales of his extravagances while working at Stratton Oakmont in a New York Magazine interview. This wasn’t the typical office environment you’d encounter on Wall Street.

Belfort reveals he was heavily consuming narcotics including heroin, cocaine and morphine.8 He went on to account of excessive use of prostitutes, illegal drugs and other egregious activities profiled in the movie.9 He once owned a luxury yacht which subsequently sank off the coast of Italy after Belfort insisted on sailing into rough weather.10 All of the crew was eventually rescued by Italian Navy.11 This was the financial advisor that 1500 clients entrusted money to.

Restitution

Greg Coleman, an FBI agent specializing in financial frauds and money laundering, worked the case against Belfort. Belfort was facing two decades in prison but decided to work a deal with the Feds. Belfort agreed to wear a wire and help prosecutors bring criminal cases against associates. This strategy worked to Belfort’s advantage as he only served 22 months in federal prison.12

After serving prison time, Belfort was forced to pay back the $110 million to his victims. Since he didn’t have it, he was ordered by a judge to pay half of his future earnings to his victims in an effort to make them whole again. Many claim he has not done so and some report he has paid them nothing, despite living a posh, country club lifestyle in California. According to Businessweek, Belfort was paid $1.2 million for movie rights, but only $21,000 had been paid as restitution.13 He also has transformed himself into a popular motivational speaker, reportedly earning between $30,000 and $75,000 for a speaking fee.14 Unfortunately, it seems that crime does pay sometimes.

 

1http://time.com/104734/jordan-belfort-real-wolf-of-wall-street/
2,4,10,11,13,14https://en.wikipedia.org/wiki/Jordan_Belfort
3,8,9http://nymag.com/news/features/jordan-belfort-2013-12/
4,5,6,7,12http://www.wsj.com/articles/SB10001424052702303453004579290450707920302

 

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Masters of Fraud: The Wolf of Wall Street
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Masters of Fraud: The Wolf of Wall Street
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Next in our Masters of Fraud series is Jordan Belfort. While he may not be a household name, his notorious moniker, ‘The Wolf of Wall Street’ is becoming just that.
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www.FinancialCareerOptions.com
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2016-10-21T11:03:06+00:00 July 25th, 2016|

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