Stratton Oakmont

The rise of the OTC brokerage firm Stratton Oakmont came about when the very talented Jordan Belfort created it. A natural salesperson, started to work on Wall Street in the late 1980s, and put his sales skills to work. He worked for a brokerage firm learning the ways of being a stockbroker. With much success, a few years later he opened up, and started to operate the power house trading company known as, Stratton Oakmont.

A little overview of the firm, in the late 80s and 90s the firm was responsible for the IPO of 35 companies including Steve Madden.

With Belfort’s partner Danny Porush they made an influx of money by using a “Pump and Dump” Scheme. A pump and dump scheme is essentially calling potential clients or current clients giving them false stock recommendations in attempt to boost the stock price. Then the wrongdoers in these acts who also had shares in the company would sell their positions when the stock price rose.

This type of scheme was targeted at smaller companies because do to the small float of shares it was easier to manipulate the share price.

This is essentially what Belfort had his employees trained to do. They would push a certain stock down on clients until they bought it. At first it was penny stocks, but eventually led to higher market cap stocks.The brokers would push their clients to buy and once they bought, the share price of a certain stock would increase, and then the brokerage firms would sell out and make tremendous gains.

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To show how crazy this company was, their motto was “Don’t hang up the phone until the customers buys or dies”. Belfort, and employees made sure every time they picked up that phone there would be a sale.

Stratton Oakmont was the market maker for a stock that held a very short float. They had a huge volume of shares, and the firms incentivized their brokers with bonuses, and commissions to place the stock into as many hands as possible. The down size of this is once Stratton Oakmont sold their huge positions, it dramatically lowered the stock price, which resulted in tremendous losses for the investors that Stratton Oakmont sold the stocks shares too.

During its tenure Stratton Oakmont was responsible for 35 Initial Public Offerings (IPOs) including fashion shoe powerhouse, Steve Madden. An initial public offering is when a company first sells their stock to the public. Public companies must form a board of directors and in the United States public companies must report to the SEC. Companies will go public for many reasons but the main reason is to raise funds from public investors to fuel growth of the company.

Stratton Oakmont was found guilty of stock manipulation in 22 of their IPO’s over the time the firm was operating. Stratton would push the stocks that they were sponsoring IPOs for to their investors to inflate to price and then sell shares privately held by the company and its affiliates to earn a profit for themselves all while making their client’s investments near worthless. During the IPO of Steve Madden the owner of the company, Steve Madden, was found guilty of this stock manipulation along with Stratton (although no admission of guilt was given).

Madden was found guilty of being a “Flipper” where he sold back his stock to Stratton and other affiliates in order to help the firm inflate the price before the two sold their shares for a massive profit at the expense of investors. Madden had an agreed upon profit that he would make before the IPO which is also Illegal. Stratton and Madden together violated the Securities Act of 1934 and the Securities Investor Protection Act of 1970. For these actions Steve Madden himself was banned from acting as company director for his or any other company as well as was forced to pay $7.8 Million in fines.

With the pump and dump being Stratton’s biggest violation, money laundering comes up close behind. Money laundering is the process of taking money made illegally, and then making the money appear to being legitimately earned. Jordan Belfort did this to avoid heavy U.S. taxes and hide his illegally made profits.

There are three steps to money laundering: the Placement Stage, the Layering Stage, and the Integration Stage. During the first stage, Placement, the “dirty” cash is placed into a financial system. Jordan Belfort had his cash placed into an “offshore” bank account. This is very common as the reason for this is the country has either no or minimal taxes, they have minimal Financial Regulations, and they keep client information very private. In the movie Jordan has his money placed in a Swiss Bank- in real life his money was most likely placed in banks of many countries, probably mostly European countries.

The two reasons for the placement stage is the criminal no longer has the stress of holding onto a large sum of money and the money is placed into a financial institution. During this first stage, a person doing this crime is most likely to be caught, compared to the other two stages. There are a lot of different Placement methods like loan repayment, gambling currency exchanges, etc. Jordan Belfort likely did a lot of these but the one that sticks out the most is Currency Smuggling- which is moving illegal money over the border.

The second stage of money laundering is the Layering Stage, also known as structuring. This is a very complex stage and simply put, it is seperating the illegal money from its source and is done through “sophisticated” layering of financial transactions meant to throw off the audit trail. An example of how to do this is, after Jordan Belfort places his money into an out of the country bank, he then uses that money for a number of investments in overseas markets constantly moving them to avoid getting detected.

The final stage in money laundering is the Integration Stage. During this stage the money is returned to the criminal as it looks to have come from legitimate sources- and going forth with the example, oversea investments.

From 1989 onward, Stratton Oakmont, Inc. was under-constant scrutiny from the National Association of Securities Dealers(NASD), now known as the Financial Industry Regulatory Authority, and other regulatory institutions. Within less than a decade, the NASD brought twelve disciplinary actions against Stratton Oakmont. Finally on April 8th, 1996, the NASD fined Stratton Oakmont $325,000 for defrauding investors and other violation in connection to its underwriting of an initial public offering for IPS Health Care, Inc. Head trader, Steven P. Sanders, was also fined $50,000. Stratton’s registered representatives had encouraged its customers to purchase units in this IPO just a few days before its “quiet period” had ended.

A “quiet period” refers to the time from when a company files its registration statement with the SEC to when the SEC staff declares the registration statement “effective”. During the “quiet period”, federal securities laws prohibits management teams and other related parties from releasing information to the public, specifically barring firms from forecasting or expressing any opinions about the value of the company. By Stratton Oakmont accepting payments from customers before the SEC declared the IPO effective, the firm took part in “gun-jumping”.

During this period, Stratton sold 13% of the total units to 71 customers for an approximate total of $573,562. The NASD also found that before completing its role in the distribution, Stratton solicited and received customer sale orders from more than 300 customers. The brokerage firm violated numerous NASD rule and Securities Act of 1933. It was later announced that the firm had made a settlement, which required Stranton and Sanders to pay their fines by April 15th, and for Sanders to be suspended from associating with any NASD member for 45 days. Sanders also agreed to refrain from trading related activities for any NASD member firm for 50 days. However, this was not the end of the bad news for the brokerage firm.

On December 5th, 1996, the NASD announced it had permanently expelled Stratton

Oakmont from the securities industry. The ruling followed Stratton Oakmont’s appeal of the original sanction of a one-year prohibition against effecting any principal retail transactions. The decision to increase the original sanction to expulsion was made by NASD Regulation National Business Conduct Committee (NBCC). The NBCC commented its reasoning for the ruling “ due to the number and gravity of the violations which have been sustained, and the number and gravity of the firm’s relevant prior disciplinary incidents, [The NBCC] find that this history establishes a coherent pattern of willful disregard for regulatory requirements and regulatory authority, as well as a failure of lesser steps to remediate the firm’s conduct.’ In addition to its expulsion, Stratton Oakmont’s President Daniel M. Porush and head trader Steven P. Sanders were barred, fined, and censured. The NBCC also ordered Stratton to pay $416,528 in restitution to customers, fined $500,000 and censured. The following year, the firm was forced to liquidate to pay off its numerous fines and settlements. Lastly, Jordan Belfort plead guilty to securities fraud and money laundering in 1999. After cooperating with authorities, he was sentenced to 4 years in prison and personally fined $110 million. After agreeing to give a testimony against numerous partners and subordinates in his fraud schemes, Belfort served 22 months of this 4 year sentence.

Works Cited

  1. Condon, Nancy A. “NASD Fines Stratton Oakmont $325,000 for Fraud and Other Violations;Suspends and Fines Head Trader.” Types of Investments | FINRA.org, 8 Apr. 1996, www.finra.org/newsroom/1996/nasd-fines-stratton-oakmont-325000-fraud-and-
  2. _ other-violationssuspends-and-fines-head.
  3. Condon, Nancy A. “NASD Regulation Expels Stratton Oakmont; Principals Also Barred.” Types of Investments | FINRA.org, 5 Dec. 1996, www.finra.org/newsroom/1996/nasd-regulation
  4. -expels-stratton-oakmont-principals-also-barred.
  5. Knight, Jerry. “PENNY STOCK FIRM STRATTON OAKMONT FINED $325,000 BY NASD IN FRAUD CASE SETTLEMENT.” The Washington Post, WP Company, 9 Apr. 1996, www.washingtonpost.com/archive/business/1996/04/09/penny-stock-firm-stratton-
  6. oakmont-fined-325000-by-nasd-in-fraud-case-settlement/0892c62c-c440-42b9
  7. -a78f-40b47ed10c2d/?utm_term=.f9567649c792.
  8. “Quiet Period.” SEC Emblem, 2 Sept. 2011, www.sec.gov/fast-answers/answersquiethtm.html.

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Stratton Oakmont. (2022, Jun 22). Retrieved from https://paperap.com/stratton-oakmont/

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