The Greed Report: Wolf of Wall Street type scams live on
If you think self-proclaimed “Wolf of Wall Street” Jordan Belfort’s pump-and-dump scam is a colorful piece of stock market history that’s been addressed by regulatory reforms, look no further than an order just this week from the Securities and Exchange Commission. It’s proof the practices that made Belfort a legend among crooks are alive and well.
The order suspends trading in 128 so-called penny stocks, also known as microcaps, over-the-counter, or pink sheet securities—the same kinds of stocks that Belfort and his Stratton Oakmont cronies trafficked in. Ostensibly, they are shares of companies that are too small to be listed on a stock exchange. As a result, they are subject to less stringent standards than big corporations. The stocks sell for as little as a few cents a share.
Some penny stocks are legitimate. A small company, say a startup with an innovative product, could decide to sell microcap shares to the public as a way to raise money for expansion. Theoretically, an investor can buy a piece of the action for a small amount of money, and then make a killing if the company takes off. Say you buy 1,000 shares of Company X at 10 cents a share, and the price climbs to $5.00. Your $100 investment is now worth $5,000—a 4,900 percent increase!
Some investors find those kinds of returns hard to resist, which is exactly what scam artists are still counting on 20 years after Jordan Belfort’s penny stock scam came to an end.
Because microcap companies issue such a small number of shares, a crooked brokerage can accumulate enough to manipulate them Belfort-style—hyping the stock to unsuspecting investors in order to pump up the price, then dumping the rest until the stock becomes worthless and the investors who bought during the run-up are wiped out.
The new SEC order targets dozens of companies in 24 states and Canada that officials say could be fodder for future pump-and-dump schemes. All the stocks have legitimate-sounding names. They even have ticker symbols like their big-stock brethren. But the agency says these companies are essentially zombie stocks—dormant firms that a modern-day Belfort could seize, pump and dump.