The Wolf of Wall Street Scam Explained

Content Producer · 9 August 2018
The blockbuster hit The Wolf of Wall Street proved that truth is indeed stranger than fiction.

This hugely entertaining film was inspired by the life of stockbroker and founder of Stratton Oakmont, Jordan Belfort. It’s easy to get wrapped up in the lavish lifestyles and outlandish antics of the characters, and forget that during the seven years Stratton Oakmont was in business it defrauded investors out of hundreds of millions of dollars.

So, what were they doing?

From the outside Stratton Oakmont may have looked like a legitimate stock brokerage firm, but in reality it was a bona fide boiler room. A boiler room is a term used to describe an outbound call centre that sells questionable stocks and investments, often over the telephone or through email.

Stratton Oakmont practised dishonest tactics in order to push under-performing stocks (typically penny stocks) on to unsuspecting victims. The company’s employees often spouted false and misleading claims to investors to sell more stocks and drive up the price of shares. All the while, Stratton Oakmont already owned shares in the companies they were trading. When their schemes led to a higher share price they would then sell their holdings and walk away with a hefty profit. This tactic is known as ‘pump and dump,’ which is a form of fraud.

Catching the Wolf of Wall Street

Jordan Belfort’s stock manipulation strategy eventually caught up with him and in 1996 Stratton Oakmont was forcibly closed. Jordan Belfort was banned from the brokerage industry, jailed and required to pay back $110 million to the investors his company had deceived.

Although Stratton Oakmont no longer exists, they are surely not the first nor the last company to run a boiler room operation. According to the Australian Competition & Consumer Commission’s ScamWatch, in the first six months of 2018 Australians lost over $26 million due to investment fraud. So, how can you spot a scam and ensure that you don’t get caught out.

How to spot an investment scam

There are a few warnings signs that you should be aware of that may help you spot a potential scam. According to ASIC’s MoneySmart website, the investment on offer may be a scam if the person selling to you:

  • does not have an Australian financial services (AFS) licence or says they don’t need one
  • rings you repeatedly and tries to keep you on the phone, or emails you a lot to keep you engaged
  • says you need to make a quick decision or you’ll miss out on the deal
  • claims to be a professional broker or portfolio manager and sounds professional, but does not have an AFS licence
  • uses a name or claims to be associated with a reputable organisation to gain credibility e.g. NASDAQ, Bloomberg
  • offers you a glossy prospectus or brochures, professional-looking share certificates or receipts, but their prospectus is not registered with ASIC.

Boiler rooms scams, using the pump and dump technique, also tend to focus on micro and small cap stocks. This is because their value is generally easier to manipulate. Information on these types of stocks is often hard to find, which can make it difficult for investors to thoroughly research the company and refute the claims of fraudsters.

Don’t get scared off

Investing can be rewarding and has the potential to help you create financial margin. So, although investment scams happen, don’t let it put you off. Keep in mind that if it sounds too good to be true, it probably is. And before you make an investment decision make sure to perform a thorough analysis of company and/or seek help from a professional financial adviser.

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