Friday, January 3, 2014

The Wolf of Wall Street

From the Desk of Joe Rollins

In anticipation of the December cinematic release of “The Wolf of Wall Street”, I decided to read both of Jordan Belfort’s books about his story before going to see the film. I found the books to be very entertaining but was incredulous that someone could waste so much money on such an excessive lifestyle – even for the wealthiest of individuals. How much of it is true or not is certainly subject to debate, but there is no arguing that it is a very fascinating story.

Despite what appeared to me to be the glorification of this main character in the film, this guy, in reality, is no hero – he is nothing but a common crook. Although it was not very clear how Jordan Belfort specifically made his millions, it was plain to see that he had no intention of truly acting as a financial adviser, and was only concerned with swindling the public for his own financial gain.

His M.O. was basically to approach companies of very little substance that he had previously invested in, and convince them to issue Initial Public Offerings. Because the shares of stocks he had previously purchased were not in his company name, the potential investors were unable to make the connection between the two and therefore had no idea he stood to gain immensely from the transaction. In nearly every case, he was the majority owner of the companies that he was taking public! It would be absolutely illegal for a true brokerage company to handle an IPO without fully disclosing their stock ownership.

Basically the way it would work is that he would put shares that he previously purchased into others’ names, so that when the stock went public, these people would be sitting on stock that was grossly undervalued as compared to the current traded value. Simultaneously, he would get hundreds of his own brokers to start creating a mass hysteria for the stock by calling unsuspecting investors. The investors had no way of knowing that the people trying to sell them the stock were also the majority owner, as this information was not disclosed anywhere in the public information.

Due to all of the frenzy of purchasing the stock, which was very thinly traded, brokerage houses started selling their own shares. This is the oldest trick in the stock brokerage business, known as “pump and dump”. The brokerage house would pump up the stock and once the price had reached a certain level, they would sell it at the expense of the investor. After the brokerage house quit pumping the stock, the value would fall, hurting the unsuspecting investors that purchased it.

What made this particular situation even more distasteful is that the people that owned the stock on behalf of Jordan would sell it and then return most of the profit to him in cash. Not only was he committing an illegal act, but he was also getting the profits all in cash and therefore not paying tax on any of it!

There is no question, the movie was a lot of fun and the books were extraordinarily entertaining, but no one should ever admire the behavior of this common criminal who also happened to be a drug addict, alcoholic and committed just about every immoral act you can imagine. My only hope is that when people see a movie such as this, they do not paint all advisors with the same broad brush.

In the movie, there is a scene where, after turning state’s witness and helping to prosecute up to 24 of his business associates, the judge finally sentences Jordan Belfort to a sentence of 36 months. Although sentenced for 3 years, he actually only served 22 months due to time off for good behavior, etc... And as if this story didn’t seem unbelievable enough as is, his cellmate during his incarceration was actually Tommy Chong of “Cheech and Chong”! Not exactly what people had pictured as him serving “hard time”!

As part of his jail sentence, he was required to forfeit all of his property and give up all of his assets. In addition, he was required to forfeit 50% of future gross income in order to repay $110 million of restitution to the 1,513 clients that he defrauded. Despite the ruling, since he was released from jail he has actually only paid $243,000 out of pocket over the last four years, although his income from the books and movie alone is approximately $2 million - not to mention the money he makes while out on the speaker circuit. I guess it just goes to prove that once a scam artist, always a scam artist.

And leave it to the U.S. Government… They seem to be so incompetent at essentially everything they do, that they cannot even get their act together enough to collect what is owed to so many victims!

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

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