MADDOX: Wolves are still at Gramma's door

February 8, 2014

MaddoxIn the movie “The Wolf of Wall Street,” Jordan Belfort, disgraced broker and owner of the now-defunct brokerage firm Stratton Oakmont, is portrayed by Oscar-nominated actor Leonardo DiCaprio as over-the-top good looking, witty and motivational. Belfort, if we are to believe what we see in the film, is a phenomenal salesman—a self-made man committed to making lots of money for himself and his friends.

What isn’t shown in the Hollywood movie is the carnage Belfort and his minions unleashed on thousands of his unsuspecting investors. Belfort ultimately scammed these investors out of more than $100 million.

My law firm represented many of Belfort’s victims. In 1999, Belfort pled guilty to charges of international securities fraud and money laundering. Facing 20 to 30 years in jail, he cut a deal with federal authorities by agreeing to gather evidence against friends and colleagues in exchange for a much lighter sentence. When the case finally went to trial in 2004, Belfort was convicted and sentenced to four years in federal prison.

In the end, he served only 22 months at a fairly cushy federal prison camp in California, sharing a cell with comedian Tommy Chong. It was Chong who encouraged Belfort to write his book.

As is the case with most white-collar criminals, his penalty didn’t fit his crimes, as much more prison time was warranted.

Missing in the screen version of Belfort’s life are the victims who became caught in his web of fraud and lies. Stratton Oakmont was a “boiler room” operation; employees used their telephones and call lists to cold-call potential investors and then push them into buying shares in companies that Stratton Oakmont held positions in. When the price of one of those stocks rose, Stratton would sell its own holdings at a huge profit, leaving thousands of smaller investors holding falling stocks—many of which became worthless.

The majority of Stratton Oakmont customers were unsophisticated investors who had little or no knowledge about the complicated world of Wall Street investing.

Belfort’s fraud is far from isolated. Similar investment schemes continue to be daily news fodder. Only the ringleaders and companies have changed—Bernie Madoff, Tim Durham, Medical Capital Holdings, Provident Royalties. Indeed, some frauds are even bigger than Belfort’s swindle. Belfort’s Stratton Oakmont was a $100 million scam, but Madoff’s Ponzi scheme dwarfed both of those—losing $18 billion for investors.

The fact that investment scams like Belfort’s continue to exist raises a number of questions, not the least of which is the relatively minor punishments given to those like Belfort who perpetuate these crimes of fraud.

Another big issue is the safety of investors and the extent to which they are actually protected from bad brokers or firms by the various securities regulators who are supposed to be the cops on the beat. This is especially relevant given the fact that many brokers today are able to simply wipe their public records clean of any negative comments or regulatory citations by seeking “expungements,” thereby deleting the bad information against them.

In the end, the story of Jason Belfort and Stratton Oakmont may best serve as a reminder for all investors to take the time to investigate their broker’s professional background and, even more important, to try to thoroughly understand the investments they are putting their hard-earned money into. If the story or sales pitch sounds too good to be true, they may be dealing with a wolf in Gramma’s negligee.•


Maddox is managing partner of Maddox Hargett & Caruso. A former Indiana securities commissioner, Maddox represents investors in securities litigation and arbitration matters. Send comments on this column to ibjedit@ibj.com.


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