The Wolf of Wall Street, Jordan Belfort, committed a classic pump and dump scam, under the guise of his investment firm, Stratton Oakmont. This crime went on for several years before the company was investigated, closed, and Belfort sent to prison. The following paper outlines this case in detail.
The Crime & How it was Committed The securities industry is governed by the Securities Exchange Commission, which exists in part to ensure that the capital markets are trustworthy. When investor trust in the markets is compromised, this makes it more difficult for firms to raise capital. Thus, it is imperative for any country to have securities regulators that ensure a fair and honest capital market system, including the stock market. There are many ways to commit fraud in the stock market, one of which is the pump and dump scheme that Stratton Oakmont committed. The principle is fairly simple. The company buys a large quantity of penny stocks. They then use their brokers to cold call people and convince them to invest. These people, who are usually fairly wealthy but not sophisticated investors, are convinced to put their money into this worthless penny stock. The influx of capital starts to push the stock price upward, so the investors are convinced that this is a good investment – that they are seeing the gains they were promised materializing. Then, when a large enough amount of capital has been gathered, the investment house begins to sell its shares. It does this quietly, so that it is difficult to detect. It sells these shares at a premium, because of the influx of the buyers. After it sells its stake, there are still many buyers left holding shares, which are no worthless. The brokerage has artificially inflated the stock price of a security that had basically no intrinsic value, and then sold out at the top of the
