The pump-and-dump schemes behind ‘The Wolf of Wall Street’
THE box office success of Leonardo DiCaprio’s The Wolf of Wall Street has again flagged the risk of pump-and-dump scams fleecing investors.
A few such schemes have hit the headlines globally this year.
In January, a US court jailed 61-year-old David Levy for nine years for running a $20-million (about R210-million) business to manipulate the share price of small companies he helped list on the stock exchange.
Levy and his wife would evidently put out inaccurate press releases about companies they helped list to boost their share prices while they were dumping shares in the market.
Earlier this year, the US Securities and Exchange Commission laid a complaint against John Babikian, a 26-year-old who used an e-mail list called “Awesomepennystocks” to punt the shares of companies to drive their share prices higher by as much as $3-billion, while he was busy flogging the shares.
The story of The Wolf of Wall Street is based on truth, relaying the yarn of how drug-infused rogue investor Jordan Belfort made millions by duping investors. Belfort evidently said once that he was disappointed he earned only $49-million in a year because it fell just $3-million shy of a million a week.
His exploits eventually came to an end with a prison term of 22 months and a fine of $110million.
So how exactly did the real Wolf of Wall Street make his money?
The fundamentals behind the immense wealth clocked up by
The savings of many American families were used to finance the debauchery
Belfort and his firm Stratton Oakmont are actually deceptively simple.
Belfort and his band of brokers would buy up stock of a company, generally small companies, until they owned a fairly large chunk.
Once Stratton Oakmont had all this stock, valued at say $1 a share, his brokers would ring his clients and try to sell them the stock.
The tactics they used were fierce.
They would punt the company as the “next big thing”, dangling the carrot of immense profit in a short period.
Demand, as you can imagine, soared.
This allowed Stratton Oakmont to sell part of the stock they owned, as the price leapt to, say, $10.
The problem was the price had increased due to superficial reasons separate from the inherent value of the shares, giving Stratton Oakmont a mammoth 1 000% profit in this case.
Ultimately, Stratton would sell all of its shares, and the price would slump back to the “pre-pump” price of about $1 a share.
While clients and outside investors would inevitably take a huge loss, Jordan and Stratton would be laughing.
This method of stock manipulation is a standard “pump and dump” — the broker pumps the price, and then sells out, leading the price to plunge.
Jordan’s most notorious instance of this was with the company Steve Madden Shoes.
Jordan had helped list Steve Madden in 1993 with an initial public offering at $5 a share.
Stratton, as the company that took the company public, wasn’t allowed to hold too much of the stock.
However, it navigated around this problem by getting people it trusted to hold Steve Madden Shoes stock in their accounts — people who were then referred to as ‘‘ratholes”.
Stratton would then secretly buy back the stock, or leave it in the ratholes’ accounts, while the brokers began pumping the stock.
The shoe company’s shares then spiked to $20 a share.
Belfort pounced, dumping the stock on unsuspecting victims and instructing his ratholes to sell their shares.
Of course, $20 a share was a massively inflated value, and soon the price slumped lower to its listing price.
Jordan and Stratton could not care. They had made a healthy profit of $20-million, money which then fuelled the debauch- ery that occurred on a daily basis in the Stratton offices.
It was a bitter irony that the savings of many American families were used to finance drugs, hookers and midget-tossing.
Steve Madden shoes have since found their way to South African shores. The business has recovered from its days as a fairly conspicuous IPO and is thriving.
But the next time you come across a leather boot with the Steve Madden logo, remember that the Wolf once sunk its fangs into it.
Newby writes for the Student Investor and The MoneyTree Magazine.