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

(Image credit: 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.

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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".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri