Daily Smart Fact #31: Boiler Rooms, Pump and Dump, and Leonardo DiCaprio

DiCaprio with a puppy, just because.

Takeaway: Jordan Belfort, the inspiration for the movie Boiler Room and the upcoming DiCaprio flick The Wolf of Wall Street, spent 22 months in jail for “crimes related to stock market manipulation and running a boiler room“.  He cooperated with the FBI and was indicted in 1998 for a “pump and dump” scheme that resulted in a $200 million loss for investors.  Jordan now lives in L.A. as a motivational speaker and lives the high life with hookers and cocaine. Fine, the last part may or may not be true. But 22 months seems a little light for screwing over thousands of investing suckers, don’t you think? Life is unfair.

Leonardo DiCaprio.  Dammit, what can’t that man do.  His most recent movie The Wolf of Wall Street is yet another testament of his abilities to make drugs, hot women taped in hundred dollah bills, and midget-throwing just look so darn fun.  I recently viewed the new movie preview and it inspired me to look into the man who inspired the movie – Jordan Belfort.  In the 90’s, Belfort founded a brokerage firm that functioned as a Boiler Room.  Boiler Room, you say?  Like that awesome movie with Ben Affleck and Giovanni Ribisi and quotes like “don’t pitch the bitch” movie?  Yup, the very one – since that movie was also inspired by Belfort.

Knowing little to nothing about Wall Street, I thought I would use today’s post to highlight these key terms and some interesting tidbits about Belfort’s life:

• Boiler Room: An outbound call center that sells questionable investments.  Typically a room where salesmen use “unfair, dishonest sales tactics” that usually result in high-pressure tactics (time-share, anyone?) to sell stocks.
• Pump and Dump: Artificially inflating the price of a stock you own through hype in order to sell that stock at a higher price. Once the price goes up, you “dump” the overvalued shares, making the price go back down and forcing investors to lose their money. Think “Enron.”  Also, the method of pumping your breast milk after a wild night of drinking and dumping the first pump before feeding your baby, so that you know, your baby doesn’t get drunk. Duh.
• Chop Stocks: An equity that is purchased at pennies per share and sold by stock brokers to retail customers at several dollars per share. “Chop” is slang for spread – “the difference between the prices the brokerages pay for stocks and the prices at which they are sold to the public.” (Source: BusinessWeek). Why is this illegal? Because chop stocks are large blocks of illiquid stocks bought from a single investor at a steep discount. The broker then chops the block of stocks and sells them to their unsuspecting clients at market price, claiming that the stocks are going to be winners. The consumer is stuck with these loser stocks, while the brokerage collects.  The spread that these brokers gain is technically not considered a commission. Also, sounds like chopsticks.
• Coco Chanel’s Yacht: Belfort was the very last owner of the luxury yacht originally built for Coco Chanel.  That yacht sank off the coast of Sardinia because Belfort insisted on sailing out in high winds “against the advice of his captain,” which resulted in the waves smashing the boat to pieces. Not going to lie, couldn’t help but feel schadenfreude when reading that.

Source.

Anywho, hope that was a bit enlightening.  Check out The Wolf of Wall Street movie preview, if you haven’t already and let me know your thoughts!