The Legacy of The Wolf of Wall Street

Jordan Belfort, known as the "Wolf of Wall Street,” made millions of dollars every year. That, plus the sex and drugs in the recent movie about him, is attracting a lot of attention.

Belfort was so high he never thought he would go down. But, he did. In 1998, the Securities and Exchange Commission shut down his company and the FBI arrested him.

His crimes were many, but one that stands out is a technique still perpetrated on unsuspecting investors today, just in a different way. It is called “pump and dump.”

In Belfort’s time, the communication used to pump a stock was the telephone. Today, it is mainly done electronically, i.e. via email. The message is something like:

“XXX stock is having a breakthrough. We expect it to reach XX within ten months. Buy now to see profits.”

Those who do purchase on this recommendation are playing into a scheme to pump up the price of a stock that will be sold later by those who sent the email. They sell it (dump) before those who they entrapped in their email scheme, and the scammers reap the benefit of their “pump” before the victims have a chance to react.

The average profit that the spammers make is up to a 5% to 6% return, not bad for a nameless, but not victimless crime.

We know that, often, when someone in the stock market makes money, another loses it. In this case, it is all those who purchased the stock on the basis of an email in the hopes of making a quick return. They did not do their own research. The buyers who purchased did so on the recommendation of nothing more than an electronic communication from an unknown person or company. These faceless targets, who likely sold after the stock’s promoters, lose money.

What makes people buy stock they know nothing about? It is optimism over realism or, in some few cases, the elderly, whose judgment is impaired when they can otherwise appear normal. In either case, the victim is someone who likely cannot afford to lose money.

This means that Jordan Belfort, as despicable as his selling practices were, lives on today in a different form now that he is barred from the investment business. Others have taken his place.

Further reading:

Navigate Investing Minefields

Aging and Investment Decisions