The pump and dump scheme
“Of all the drugs under God’s blue heaven, there is one that is my absolute favorite — Money. Enough of this sh-t will make you invincible — able to conquer the world and eviscerate your enemies,” securities trader Jordan Belfort says in Martin Scorsese’s award-winning biopic, The Wolf of Wall Street. The 2013 movie set a new Guinness World Records record title for the most swearing in one film, with the f-word expletive used 506 times — an average of 2.81 times per minute (https://www.guinnessworldrecords.com).
Scorsese must have taken a lot of liberties to characterize the infamous Jordan Belfort (famously portrayed by Leonardo DiCaprio, who won the Golden Globe Best Actor for this) as crude, obsessed, and grossly depraved. But Belfort had given unequivocal consent for his portrayal, as the movie was based on his own 2007 memoir of the same title, where he related his career as a stockbroker in New York City and how he ran his 1980s Over-the-Counter (OTC) stock brokerage firm, Stratton Oakmont, to defraud small investors in penny stocks with his signature “pump and dump” scheme.
“Rule Number One,” Belfort says in the film, “F-ck what they think.”
The three-hour “epic” of Belfort’s how’s and why’s in his life and career opens with a troubling scene. It is a rowdy office party; half-crazed merrymakers take turns trying to catapult a live-and-kicking little clown onto a sticky bulls-eye wall set up with a huge dollar sign. Jordan Belfort, the big boss and owner of Stratton Oakmont, is rousing his securities traders: “The only thing standing between you and your goal is the bullshit story you keep telling yourself as to why you can’t achieve it.” And the seemingly hypnotized cult group chanted, “Money, money!”
That was Belfort’s trademark: he was (and still is) a motivational speaker, generically a salesman. He knew only too well how to convince people to buy into his ideas and use his products. His initial target market were his employees, who absorbed his style and philosophy in the criminal deviousness of the “pump and dump” investment schemes and inflated IPOs (Initial Public Offering in the equities market). At its peak, the firm is said to have employed about 1,000 stockbrokers overseeing investments of more than $1 billion. Small investors were pretty much like the little clown hurled like a dart at the bulls-eye at their office party.
Pump-and-dump is a manipulative scheme that attempts to boost (pump) the price of a stock or security through fake recommendations. These recommendations are based on false, misleading, or greatly exaggerated statements. The perpetrators (brokers, traders) already have an established position in the company’s stock and will sell (dump) their positions after the hype has led to a higher share price (https://www.investopedia.com). This was traditionally conducted through “cold calling,” which we see in the movie as the frenzied traders rushing to the telephone to call their quota of potential investor-clients after Belfort’s hype and hoopla about the targeted inflated security. Belfort drafted the spiel for his traders to read to clients. The usual come-on is “inside info” about an imminent development that will surely lead to a dramatic rise in the share’s price. Convinced buyers pump the stock even higher by the increased demand. The pump and dump scheme operated by Stratton Oakmont resulted in investor losses of roughly $200 million (https://www.beatingtheindex.com).
A Telegraph article cited by the same site said that Belfort was making close to $1 million a week and that he once earned over $12.5 million in three minutes. Another article in the Independent states that he was earning an estimated £600,000 a week, which is around $937,500 using 2014 exchange rates when the article was published (Ibid.). Of course, those amounts were not yet net of Belfort’s profligate spending on expensive drugs, society prostitutes, and his lavish lifestyle of parties and orgies in his mansions, jets, and yachts. He sniffed cocaine through a rolled-up $100 bill and threw thousands of dollars in the air in his stupor.
Stratton Oakmont was hounded by the National Association of Securities Dealers (NASD) until the firm was shut down in 1996. In 1999, Belfort and his associate Danny Porush were indicted for money laundering and securities fraud. After a plea bargain where Belfort ratted on his partners in crime including Danny, he was sentenced to four years and ultimately served 22 months in prison. Following his release from prison, and as part of his restitution agreement, Belfort was required to pay 50% of his income to his defrauded clients through 2009. Federal prosecutors filed a complaint in 2013, alleging that Belfort reneged on his obligations to his victims until he reached again a separate deal with federal authorities to complete the restitution payments.
Since his release from prison Belfort has re-engineered himself as, guess what — a professional motivational speaker. His speaking engagements are run through his business, Global Motivation, Inc. Perhaps Belfort has since replaced his imagery of that little clown tossed like a dart towards the bulls-eye just like the exploited victims of his glib tongue and what he espoused. Taking advantage of others by fake news or manipulated slants was criminal then, as it is now. The intricate deceit in money laundering hurts the common good, like stealing and cheating.
Yet the pump and dump scheme has thrived, with extensive online trading and transactions of almost any and all financial products, with traders, brokers, or whoever wishing to sell to even randomly selected potentially impressionable “investors.” Belfort has lost his audience to the internet. In January 2018, JT Hamrick et al. published The Economics of Cryptocurrency Pump and Dump Schemes, an expose on the scams on the manipulated and faked trading values of Bitcoin and 2,000 other cryptocurrencies, still unregulated by governments.
Scams by opportunists can thrive in recessions because of the frantic efforts of most investors to recover thinning or lost spreads in trading, downtrends in interest income, bond yields, even negative savings rates eaten up by inflation. Currency exchanges are volatile, as the whole world is in differing unstable economic conditions — all in some level of recession. In the twin calamity of the COVID-19 pandemic and world recession, many businesses closed and bankruptcies were declared. Enter the fabricators of fake or magnified “good news” to offer solutions to desperate investors.
The US Securities and Exchange Commission offers advice on pumped-up investment opportunities, which are relevant and applicable to democratic economies (https://www.sec.gov):
1. Consider the Source. When you see an offer on the internet, assume it is a scam, until you can prove through your own research that it is legitimate.
2. Find Out Where the Stock Trades. OTC transactions which are generally among the riskiest and most susceptible to manipulation.
3. Independently Verify Claims. Before you invest, make sure you’ve independently verified grandiose claims.
4. Research the Opportunity. Always ask for — and carefully read — the prospectus or current financial statements.
5. Watch Out for High-Pressure Pitches. Don’t fall for the line that you’ll lose out on a “once-in-a-lifetime” chance to make big money if you don’t act quickly.
6. Always Be Skeptical. Whenever someone you don’t know offers you a hot stock tip, ask yourself: Why me? Why is this stranger giving me this tip? How might he or she benefit if I trade?
If it sounds too good to be true, it probably is… not true.
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
