Advertisement

Great frauds in history: Jordan Belfort and Stratton Oakmont

Jordan Belfort followed the traditional “boiler room” model of using high-pressure sales techniques to sell shares in dubious companies to investors.

Jordan Belfort
457508111

Getty Images

Jordan Belfort (pictured), born in New York in 1962, ran a business selling ice-cream and seafood door-to-door before his firm went bankrupt. He then briefly became a stockbroker with Wall Street firm LF Rothschild, but was fired in the aftermath of the 1987 crash, which caused the bank to collapse. Belfort then joined a "penny stock" firm, Investors Center, before founding Stratton Oakmont, initially as a franchise of Stratton Securities, though he would later buy out the parent firm. During the 1990s Belfort's firm became extremely successful, employing 1,000 people and selling $1bn worth of shares.

What was the scam?

Stratton Oakmont followed the traditional "boiler room" model of using high-pressure sales techniques to sell shares (which Stratton owned) in dubious companies to investors. In many cases, Stratton would lure its clients in by allowing them to make a profit on their initial trade. It would also promise them a large allocation of shares in an initial public offering, only to later claim that the shares were only available at a much higher aftermarket price (created in part by phoney trades). Shortly after all the shares had been sold, the price would quickly collapse.

What happened next?

Stratton Oakmont was in trouble with the authorities almost from its founding in 1989, but it was not until 1996 that it was finally shut down. Even then it would take three more years for Belfort to be indicted for securities fraud and money laundering. Despite admitting to manipulating the stock of 34 companies, Belfort escaped with only a two-year jail sentence thanks to his decision to co-operate with the authorities (co-founder Danny Porush would get four years). Belfort was also required to pay $110m in restitution. The Wolf of Wall Street, a book by Belfort based on his experiences, became a bestseller and was turned into a hit movie, but less than $12m has been recovered from the fraudster, mainly from the initial liquidation of his estate. The 1,513 people who were defrauded by Belfort have only received a fraction of the money that they lost.

Lessons for investors

Buying investments on the basis of an unsolicited phone call is rarely a good idea. It might be an idea to pay attention to press reports too: Forbes magazine described him as early as 1991 as "a kind of twisted Robin Hood".

Advertisement
Advertisement

Recommended

Visit/investments/investment-strategy/601607/will-inflation-return-or-is-japanification-the-real-threat
Sponsored

Will inflation return – or is “Japanification” the real threat?

SPONSORED CONTENT – Should we actually be concerned about deflation in the wake of Covid-19?
3 Jul 2020
Visit/investments/stockmarkets/uk-stockmarkets/601588/laura-foll-uk-stocks-small-companies-income-yields
UK stockmarkets

Laura Foll: small companies, income, and the power of equity markets

Merryn talks to fund manager Laura Foll about value, income yields and the UK market's underperformance, plus the benefits of smaller companies and th…
1 Jul 2020
Visit/economy/people/601565/nick-leeson-the-man-who-broke-barings-bank
People

Great frauds in history: Nick Leeson – the man who broke Barings Bank

"Rogue trader" Nick Leeson’s losses cost his employer, Barings Bank, an estimated £860m, plunging it into bankruptcy.
1 Jul 2020
Visit/currencies/601571/the-end-of-a-tailwind
Currencies

The end of currency a tailwind for UK investors

A weak pound and strong dollar are unlikely to keep bolstering returns for British investors over the next decade.
29 Jun 2020

Most Popular

Visit/investments/property/601606/house-prices-crash-uk-property-prices-falling-where-next
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
Visit/investments/stockmarkets/601611/nasdaq-all-time-high-markets-and-the-real-economy
Stockmarkets

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020
Visit/economy/inflation/601584/the-end-of-the-bond-bull-market-and-the-return-of-inflation
Inflation

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020