How The Wolf of Wall Street Scam Actually Worked - How Money Works - YouTube

If you are watching a YouTube channel  dedicated to finance and business,  

I am almost 100% confident that you have watched  Wolf of Wall Street at least a dozen times.

It’s an amazing movie that’s gone on to inspire a  generation of douchey sales bros around the world.

But there is one line that still  makes me angry 7 years later.

…

No no no, I WAS FOLLOWING! It does matter! I even  had my notepad and pen out ready to take notes.

Yeah well if you were anything like me you  might have been thinking the same thing.  

But that’s fine. The real Jordan Belfort  himself said that the movie was only  

loosely based of the book he wrote and that  book was only loosely based off of reality.

There were a lot of things intentionally left  out of the book because if they were left in  

they could be could be  considered proceeds of crime.

Similarly there were lot’s of things left  out of the movie because Martin Scorsese  

specialists in chronicling the rise  and fall of organized crime figures,  

not analyzing fraudulent stock market activity.

But that’s ok cause you guys have me,  so it’s time to learn How Money Works  

to lift the hood on Straton Oakmonts  questionable operations and find out  

how it let Mr Belfort rake in “almost” a  million dollars a week in ill gotten gains.

As always I would like to thank my channel members  and patrons on patreon for making it possible  

for me make a de-monetized video about literal  financial fraud. If you want to make more video’s  

like this possible please consider supporting  the channel on either of these platforms…

Jordan Belfort’s career really picked up when  he was laid off from his job at L.F Rothschild,  

a New York based stockbrokerage.

Back before the 2000’s buying stocks was  not as simple as going online and typing  

in a ticker symbol. People would actually  call a real living person (a stockbroker)  

and give them instructions on what  stocks to buy and what stocks to sell.

Oh well actually, more often than not it  would actually work the other way around,  

the stockbroker would call their clients  and tell them what to buy and sell.

The same was true of getting information. Here  in 2021 if you want to know what the price of  

GME is all you need to do is plug it into google  and hey there it is. Back in the 80’s you either  

needed to wait for tomorrows paper, or call  your broker to see what the market was up to.

Now as Matthew McConaughey  so insightfully points out,  

nobody, I don’t care if your Warren Buffet  or if your jimmy buffet, nobody knows if a  

stock is going to go up, down, sideways or in  trucking circles, least of all stockbrokers.

So why did they do this then?

…

Yeah that’s right, they earned significant  commissions by processing these trades.

These days we are used to zero commission brokers,  but that hasn’t always been the case. In the 90’s  

it wasn’t unusual for trades to cost as much as  2% of the total value of the assets being traded.

A stock broker would normally  get 1% of that and the firm the  

stock broker worked for would get the other 1%.

…

Jordan Belfort would later go  on to work at investor center,  

in reality Jordan actually worked  for a series of companies like this,  

but what the movie portrays is pretty  indicative of these types of operations.

These are what is called “over  the counter” brokerages which are  

very different from the exchange  brokerages like L.F Rothschild.

Exchange brokerages facilitate  trades on public exchanges.  

They would have a team of actual people down  on the floor of the NYSE calling out trades  

on behalf of the stock brokers in their office  who would be relaying trades from their clients.

As we had seen this system was still susceptible  to unscrupulous behavior ( mainly in the form  

of stock brokers driving their clients to  make as many trades as possible to drive  

up their commissions) but the exchange  had some level of control over all the  

players in this game to make sure  things didn’t get too out of hand.

If the exchange decided that a particular  stock broker, or a particular stock broking  

company was acting in a way that was  detrimental to the exchanges reputation  

they reserved the right to kick them off the  trading floor. This would destroy the stock  

brokerage because if they can’t make  trades, they don’t have a business.

Exchanges also heavily regulate what companies  are allowed to be listed on their exchanges.  

They audit financial statements, conduct  background checks on the management, and  

make sure that the company CEO’s mother doesn’t  pick up the phone when you call their head office.

Over the counter firms are different. They  do not utilize the services of an exchange,  

and because of this they do away with a lot of  the regulation and oversight that comes with them.

Companies can approach these over the  counter firms directly and say hey,  

I need 1 million dollars in funding to conduct R&D  

on a new piece of radar tech that has  both military and civilian applications.

The stock firm will say sure, but we keep  50% of all of the money we raise for you.

At best these companies are just desperate  for funding to get their idea off the ground,  

at worst they are also looking to defraud  investors using any money they raise.

One other thing is that 50%  number was just a bit of Hollywood  

magic. The OTC brokers were likely only  making about 10 – 20% on these trades.

Either way, it should be clear to see  that any company that needs to offer a 20%  

cut to a stockbroker just to raise money  is probably not worth investing in,  

and that is why Jordan Belfort,  and his colleague’s resorted to  

high pressure sales tactics  on unsophisticated investors.

Jordan eventually founded Stratton Oakmont,  a subsidiary of Stratton Securities, which  

was a small time dealer that could trade both  over the counter and exchange listed companies.

Belfort and his co-founders, Brian Blake and  Danny Porush (portrayed as Donnie Azoff in  

the 2013 film) later bought out the entire firm  and started to change how things would be run.

Belfort had been making  good money by, as he put it…

…

But he had grander ambitions.

He went on to hire a team of brokers who would all  aggressively pitch whatever stock he told them to.

Before giving this order he  would call up unaffiliated,  

but trustworthy connections who would buy up a  large amount of stock in a small value company,  

preferably one with less than a one  hundred million dollar market cap.

Once his connections (affectionately called rat  holes) owned a big enough portion of the company,  

he would instruct all of the  brokers on his sales floor to  

go out and sell the stock to whoever would buy it.

The buying frenzy would drive  up the price which would have  

the convenient side effect of making  it easier to sell to new investors  

“this stock has doubled in value this week”  “get in now or you’re going to miss out”.

Once the price of the stock had  reached a certain level Jordan  

would instruct his rat holes to start selling.

While this was happening Jordan's company would  make it incredibly difficult for their regular  

clients to sell off the stock, brokers  would be instructed to not answer phone  

calls from investors looking to sell, or  just to intentionally lose trade orders.

This gave the rat holes time to exit  their positions, and as soon as regular  

investors could start selling their  own stock the price would collapse.

The rat holes would then give the money they made  

to Belfort while keeping a  small cut for themselves.

This scheme was taken to new heights when  Stratton Oakmont started taking companies public.

An Initial Public Offering is when a company  is first listed on a public exchange.  

There are lots of rules and regulations involved  in this process but the advantage to the business  

at the end of the day is that it becomes much  easier to raise capital from public markets.

Businesses will hire an underwriting firm  to guide them through the process and assume  

some of the risk of the whole operation. The  underwriting firm will then be responsible  

for making sure the IPO is successful. A  successful IPO really just means all of  

the shares that the company wants to sell,  get sold at or above the agreed upon price.

Normally companies will go to investment  banks to do their underwriting, but in  

it’s prime Stratton Oakmont managed to court  a few companies to use their services instead.

You might have thought that the re-introduction  of public exchanges into the mix would have slowed  

down Belfort’s scheming. There was a reason he  traded in over the counter stocks in the first  

place, and that was to avoid the regulation and  scrutiny that comes with these public markets.

But Jordan didn’t let that stand in his way,  

in fact he developed a system to get  the best out of both of these systems.

Jordan would instruct his ratholes to buy up stock  in a company that he was about to take public.  

The company would then debut on a  public market and he would instruct  

his army of brokers to sell the  IPO stock to all of their contacts.

This would drive up the price of  the stock just like it did before,  

but this time because it was  listed on a public market,  

it would attract the attention of other investors  who didn’t even know who Stratton Oakmont was.

People would just hear the  news that some IPO was up 50%  

at open and they would want to get in on  that action. The rat holes could then use  

this buying mania to silently sell their  stocks netting them a very healthy profit.

Jordan effectively combined the  unregulated environment of over  

the counter operations with the  inherent trust investors had in  

publicly traded stock to create  the ultimate money making scam.

and that’s how you make…

…

For those of you who haven’t connected the dots  yet, this is what is called a “pump and dump”  

and it was the mechanism by  which Belfort made millions.

For a while it actually looked like these  schemes were becoming a thing of the past.  

Online stock trading platforms and  easy access to market information  

meant that investors were no longer exposed to  brokers who would hype up some small cap company.

Unfortunately the rise of loosely regulated  crypto markets has meant that pump and dump  

schemes are back with a vengeance. The  only difference is today the coked-up  

stockbrokers have been swapped out for  discord communities and gaming influencers,  

and penny stocks have been replaced  with dumb trucking meme coins.

…

Another important part of the movie was how Jordan  hid his money once he had made it. I don’t have  

time to go into that in this video but fortunately  I actually made an entire video on exactly how you  

could do this if you ever found yourself in the  possession of a large pile of ill gotten gains.

So go and watch that video if you think that’s  something that’s likely to happen to you.

As always a special thank you to my  channel members and patrons on Patreon  

for making it possible for everybody  to keep on learning How Money Works.