if you are watching a youtube channel
dedicated to finance and business i am
almost 100 confident that you have
watched the wolf of wall street at least
a dozen times it's an amazing movie
that's gone on to inspire a generation
of douchey sales bros around the world
but there is one line that still makes
me angry seven years later
an ipo is an initial public offering
it's the first time a stock is offered
for sale to the general population now
as the firm taking the company public we
set the initial sales price and sold
those shares right back to our friends
yeah
look
i i know you're not following what i'm
saying anyway right that's that's okay
that doesn't matter
no no no i was following it does matter
i even had my notepad and pen out ready
to take notes yeah well if you were
anything like me you might have been
thinking the same thing but that's fine
the real jordan belfort himself said
that the movie was only loosely based
off the book that he wrote and the book
was only loosely based off reality
there were a lot of things intentionally
left out of the book because if they
were left in they could be considered
proceeds of crime similarly there were
lots of things left out of the movie
because martin scorsese specializes in
chronicling the rise and fall of
organized crime figures not analyzing
fraudulent stock market activity but
that's okay because you guys have me so
it's time to learn how money works to
lift the hood on strat and oakmont's
questionable operations and find out how
it let mr belfor rake in almost a
million dollars a week in ill-gotten
gains
as always i would like to thank my
channel members and patrons on patreon
for making it possible to make a
demonetized video about literal
financial fraud if you want to make more
videos like this possible please
consider supporting the channel on
either of these platforms jordan
belfort's career really picked up when
he was laid off of his job at lf's
rothschild a new york-based stock
brokerage back before the 2000's buying
stocks was not as simple as going online
and typing in a ticker symbol people
would actually call a real living person
a stock broker and give them
instructions on what stocks to buy and
what stocks to sell more often than not
it would actually work the other way
around the stock broker would call their
client and tell them what stock to buy
and sell
the same was true of getting information
here in 2021 if you want to know what
the price of gme is all you need to do
is plug it into google and hey there it
is back in the 80s you either needed to
wait for tomorrow's newspaper or call
your broker to see what the market was
up to
now as matthew mcconaughey so
insightfully points out nobody i don't
care if you're warren buffett or jimmy
buffett nobody knows if a stock is going
up down sideways or in circles least of
all stock brokers so why did they do
this then you and me the brokers
were taking home cold hard cash via
commission [ __ ]
right
yeah that's right they earn significant
commissions by processing these trades
these days we are used to zero
commission brokers but that hasn't
always been the case in the 90s it
wasn't unusual for trades to cost as
much as two percent of the total value
of the assets being traded a stock
broker would normally get one percent of
that and the firm that the stock broker
worked for would get the other one
percent jordan belfort would later go on
to work at investor center in reality
jordan actually worked for a series of
companies like this but what the movie
portrays is pretty indicative of these
types of operations these are what is
called over-the-counter brokerages which
are very different from the exchange
brokerages like lf rothschild exchange
brokerages facilitate trades on public
exchanges they would have a team of
actual people down on the floor of the
new york stock exchange calling out
trades on behalf of the stock brokers in
their office who would be relaying
trades from their clients as we have
seen this system was still susceptible
to unscrupulous behavior mainly in the
form of stock brokers driving their
clients to make as many trades as
possible to drive up their commissions
but the exchange had some level of
control over all the players in this
game to make sure things didn't get too
out of hand if the exchange decided that
a particular stock broker or particular
stock brokering company was acting in a
way that was detrimental to the
exchange's reputation they deserve the
right to kick them off the trading floor
this would destroy stock brokerages
because if they can't make trades they
don't have a business
exchanges also heavily regulate what
companies are allowed to be listed on
their exchanges they audit financial
statements conduct background checks on
the management and make sure that the
company's ceo's mother doesn't pick up
the phone when you call their head
office over-the-counter firms are
different they do not utilize the
services of an exchange and because of
this they do away with a lot of the
regulation and oversight that comes with
them companies can approach these
over-the-counter firms directly and say
hey i need one million dollars to
conduct funding on r d on a new piece of
radar tech that has both military and
civilian applications the stock firm
will say sure but we keep 50 of all the
money we raise for you at best these
companies are just desperate for funding
to get the idea off the ground and at
worst they are also looking to defraud
investors using any money they raise
another thing is that 50 number was just
a bit of hollywood magic the otc brokers
were likely only making 10 to 20 on
these trades
either way it should be clear to see
that any company that needs to offer a
20 cut to a stock broker just to raise
money is probably not worth investing in
and that is why jordan belfort and his
colleagues resorted to high pressure
sales tactics on unsophisticated
investors jordan eventually founded
stratton oakmont a subsidiary of
stratton securities which was a small
time dealer that could trade both
over-the-counter and exchange listed
companies buffer and his co-founders
brian blake and danny porish portrayed
as donnie ozoff in the 2013 film later
bought out the entire firm and started
to change how things would be run
belfort had been making good money by as
he put it selling garbage to garbagemen
and making cash hand over fists but he
had grander ambitions he went on to hire
a team of stock brokers who would all
aggressively pitch whatever stock he
told them to before giving this order he
would call up unaffiliated but
trustworthy connections who would buy up
a large amount of stock in a small value
company preferably one with less than a
100 million dollar market cap
once his connections affectionately
called rat holes owned a big enough
portion of the company he would instruct
all of the brokers on his sales floor to
go out and sell the stock to whoever
would buy it the buying frenzy would
drive up the price which would have the
convenient side effect of making it
easier to sell to new investors this
stock has doubled in value this last
week get in now or you're going to miss
out once the price of the stock had
reached a certain level jordan would
instruct his rat holes to start selling
while this was happening jordan's
company would make it incredibly
difficult for their regular clients to
sell off the stock brokers would be
instructed to not answer phone calls
from investors looking to sell or just
to intentionally lose trade orders this
gave rat holes time to exit their
positions and as soon as regular
investors could start selling their own
stock the price would collapse the rat
holes would then give money they made to
belfort while keeping a small cut for
themselves this scheme was taken in new
heights when stratton oakmont started
taking companies public an initial
public offering is when a company is
first listed on a public exchange there
are lots of rules and regulations
involved in this process but the
advantage to the business at the end of
the day is that it becomes much easier
to raise capital from public markets
businesses will hire an underwriting
firm to guide them through the process
and assume some sort of risk of the
whole operation the underwriting firm
will then be responsible for making sure
the ipo is successful a successful ipo
really just means that all of the shares
that the company wants to sell get sold
at or above the agreed-upon price
normally companies will go to investment
banks to do their underwriting but in
its prime strat notemonk managed to
court a few companies to use their
services instead
you might have thought that the
reintroduction of public exchanges into
the mix would have slowed down belfort
scheming there was a reason he traded
over-the-counter stocks in the first
place and that was to avoid the
regulation and scrutiny that comes with
these public markets but jordan didn't
let that stand in his way in fact he
developed a system to get the best out
of both of these systems jordan would
instruct his rat holes to buy up stock
in a company that he was about to take
public the company would then debut on
the public market and then he would
instruct his army of brokers to sell the
ipo to all of their contacts this would
drive up the price of the stock just
like it did before but this time because
it was listed on a public market it
would attract the attention of other
investors who didn't even know who
stratton oakmont was people would just
hear the news that some ipo was up 50 at
open and then they would want to get in
on that action the rat holes could then
use the spying mania to silently sell
their stocks netting them a very healthy
profit jordan effectively combined the
unregulated environment of
over-the-counter operations with the
inherent trust investors had in publicly
traded stocks to create the ultimate
money-making scam and that's how you
make 22 billion dollars in 300
for those of you who haven't connected
the dots yet this is what you call a
pump and dump and it was the mechanism
by which jordan belfort made millions
for a while it actually looked like
these schemes were becoming a thing of
the past online stock trading platforms
and easy access to market information
meant that investors were no longer
exposed to brokers who would hype up
some shitty small cap company
unfortunately the rise of loosely
regulated crypto markets has meant that
pump and dump schemes are back with a
vengeance the only difference is today
the coked up stock brokers have been
swapped out for discord communities and
gaming influencers and penny stocks have
been replaced with stupid meme coins
another important part of the movie was
how jordan hid his money once he had
made it i don't have time to go into
that in this video but fortunately i
have made an entire video on how exactly
you could do this if you ever found
yourself in the possession of a large
pile of ill-gotten gains so go and watch
that video if you think that's something
that's likely to happen to you as always
a special thank you to my channel
members and patrons on patreon for
making it possible for everybody to keep
on learning how money works
[Music]
you