All Financial Wisdom
How Did The Wolf Of Wall Street Get Rich?
The Wolf of Wall Street. Great movie. But how exactly did the main character Jordan Belfort get rich? The film focuses a lot on how he spent money, but not so much on how he earned it. Obviously these practices are completely illegal. But you can not deny that they worked.
Pump and dump
In short, this strategy consists of buying many shares of a company and artificially raising its value to sell them at the high point . This is achieved by convincing investors to buy shares of this company based on their potential revaluation possibilities.
The price of the stock goes up and at that point the investors who are perpetrating the fraud get rid of their investments, simply waiting for the bubble they have created to explode, while they already have their pockets full. Usually, both the initial purchase before “heating up” the value as well as the act of getting rid of the shares is done little by little.
In the past, the way of doing this was through cold calls, although it is still done. Nowadays, the use of the Internet (forums, social networks, spam …) have changed that and made it far more cost effective.
This type of strategy/fraud is more feasible with smaller companies with less capitalization and volume, in which small transactions are more noticeable.
That’s why the Wall Street Wolf focused on penny stocks and pink sheets. The lack of supervision and regulation of these markets made a more friendly environment for people with few scruples. His company, Stratton Oakmont, was the largest company operating in the OTC market of his time.
High pressure sales
We have spoken before about cold calls , which are considered a legitimate way to reach potential customers by the SEC (Securities and Exchange Commission).
For example, callers must indicate their company, address, telephone number, they must call between 8:00 am and 9:00 pm (unless they have express authorization), call only those who are not on the “Do Not call lists, “have written consent before taking the client’s money and treat it with respect. High pressure sales is just plain bad. The person on the phone will always be giving a sales pitch, and will have all counterarguments ready. All the time you are talking on the phone will be to sell continuously. Most likely they will not let us say a word.
The difference between a very persuasive seller and an illegal call can be subtle. Usually the salesperson will start saying that this is a unique opportunity in life, that it is confidential information, that they have developed a disruptive technology, they will refuse to offer us information in writing , and may not even be properly registered.
The film only mentions the case of Steve Madden, but the company was behind 35 IPOs. In Steve Madden’s case, the CEO and founder had to give up his position and spend 41 months in jail, although he continued to make designs for the company.
Usually when a company goes public, it contracts one or several investment banks to find the first investors (individuals, funds, etc.). Jordan Belfort had his team perfectly trained to sell, so it was not difficult to market Steve Madden.
Unfortunately, distinguishing fraudsters from honest people is tough for some who are blinded by the illusion of making millions the easy way. If it’s too good to be true, it usually is.