The Wolf of Wall Street, Reality, and the Backstory#

So, if you’re into finance channels on YouTube, chances are you’ve seen The Wolf of Wall Street. Maybe even a bunch of times. It’s a fantastic film that’s inspired quite a few, let’s just say, enthusiastic sales folks.

But here’s something that bugged the creator of this content, years after watching: that specific line where someone says they were following along in the movie. The creator felt the same way – notepad out, ready to take notes, but still confused by some of the details.

Turns out, that’s understandable. The real Jordan Belfort himself mentioned that the movie was only loosely based on his book, and even that book was only loosely based on actual reality.

• Book omissions: A lot was intentionally left out of the book because, if included, it could have been considered proceeds of crime.
• Movie omissions: Lots of things were left out of the movie too. That’s because director Martin Scorsese tends to focus on charting the rise and fall of organized crime figures, not getting deep into the analysis of fraudulent stock market activity.

But hey, that’s where this explanation comes in! The goal here is to lift the hood on Stratton Oakmont’s questionable operations and figure out how Mr. Belfort managed to pull in “almost” a million dollars a week in money he wasn’t supposed to have.

(A quick shout-out: Thanks to the channel members and patrons on Patreon. Your support makes it possible to create videos like this one, which deals with literal financial fraud and doesn’t get paid for by ads.)

How Stock Trading Used to Work (Before the Internet)#

Jordan Belfort’s career really took off after he lost his job at L.F. Rothschild. That was a stockbrokerage firm based in New York.

Back before the early 2000s, buying stocks wasn’t like it is today where you just go online and type in a ticker symbol. You’d actually have to call a real person, a stockbroker, and tell them what stocks you wanted to buy or sell.

Actually, it often worked the other way around: the stockbroker would call their clients and tell them what to buy and sell.

Getting market information was different too. In 2021, if you want the price of, say, GME, you just Google it. In the 80s, you had to wait for the newspaper the next day or call your broker to find out what the market was doing.

Now, as Matthew McConaughey famously points out in the movie, absolutely nobody – not Warren Buffet, not Jimmy Buffet – knows for sure if a stock will go up, down, sideways, or even in “trucking circles.” And that definitely includes stockbrokers.

So, why were brokers constantly calling people and telling them to trade?

Yep, you guessed it: they earned significant commissions every time they processed a trade.

These days, we’re 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 2% of the total value of the assets being traded. Typically, the stockbroker would get 1% of that commission, and the firm they worked for would get the other 1%.

Exchange vs. Over-the-Counter (OTC) Brokerages#

After L.F. Rothschild, Jordan Belfort went on to work at a place called Investor Center. In reality, he worked for a few companies like this, but the movie gives a pretty good idea of what these kinds of operations were like.

These are known as “over-the-counter” brokerages, and they’re quite different from exchange brokerages like L.F. Rothschild.

Exchange Brokerages (Like L.F. Rothschild):

• These firms help people trade stocks on public exchanges (like the New York Stock Exchange - NYSE).
• They would have a team of people actually down on the floor of the NYSE, shouting out trades on behalf of the stockbrokers in their office who were relaying instructions from clients.
• While this system was still vulnerable to some shady behavior (mostly brokers pushing clients to trade a lot to boost commissions), the exchange itself had some level of control over the participants.
• The exchange could kick a stockbroker or a firm off the trading floor if they acted in a way that hurt the exchange’s reputation. This was a huge threat, as a brokerage that can’t make trades basically goes out of business.
• Exchanges also heavily regulate which companies can be listed. They audit financial statements, do background checks on management, and make sure calling the company’s head office doesn’t get you the CEO’s mom answering the phone.

Over-the-Counter (OTC) Firms:

• These firms do not use the services of an exchange.
• Because they don’t use exchanges, they skip a lot of the regulation and oversight that comes with them.
• Companies can go to these OTC firms directly asking for funding. For example, a company might say, “Hey, we need $1 million to research new radar tech.”
• The OTC firm might agree but demand a large cut – the movie showed 50% of the money raised, but in reality, it was likely more like 10-20%.
• At best, the companies seeking funding this way are just really desperate. At worst, they’re also looking to defraud investors using the money they raise.
• Either way, if a company has to give a stockbroker a 20% cut just to raise money, it’s probably not a good investment. This is why firms like this, including Stratton Oakmont later on, resorted to high-pressure sales tactics targeting people who weren’t very knowledgeable about investing (unsophisticated investors).

The Founding of Stratton Oakmont and the Pump & Dump Scheme#

Jordan Belfort eventually founded Stratton Oakmont. It started as a subsidiary of Stratton Securities, which was a smaller firm that could trade both OTC and exchange-listed companies.

Belfort and his co-founders, Brian Blake and Danny Porush (who the actor Jonah Hill played as Donnie Azoff in the 2013 movie), later bought out the whole firm. That’s when they started changing things up.

Belfort was already doing well by his own description, but he had bigger ideas. He hired a team of brokers whose job was to aggressively pitch whatever stock he told them to.

Here’s how the core scheme worked, especially with OTC stocks:

1. Stock Selection: Belfort would pick a small, low-value company, ideally one with a market cap (total value of its stock) of less than $100 million.
2. Pre-Purchase (by “Rat Holes”): Before telling his brokers anything, he’d call unaffiliated but trustworthy connections. These connections, sometimes called “rat holes,” would buy up a large amount of stock in the chosen company.
3. The “Pump”: Once the rat holes owned a significant chunk, Belfort would tell all the brokers on his sales floor to aggressively sell this stock to anyone who would buy it. This high-pressure selling would create a buying frenzy among their clients.
4. Price Increase & Hype: The surge in buying would naturally drive up the stock price. A convenient side effect was that the rising price made it even easier to sell to new investors – brokers could point to the price doubling that week and pressure people to “get in now or you’ll miss out!”
5. The “Dump” (by Rat Holes): Once the stock price hit a certain high level, Jordan would tell his rat holes to start selling off their large holdings.
6. Hindering Regular Investors: While the rat holes were selling, Jordan’s company, Stratton Oakmont, would make it incredibly difficult for their regular clients (the ones who just bought the hyped stock) to sell their shares. Brokers might be told not to answer calls from clients wanting to sell, or they’d just intentionally “lose” the trade orders.
7. Price Collapse: This delay gave the rat holes enough time to sell their shares at the high price. As soon as the regular investors could finally start selling their stock, the sudden rush to sell would cause the price to collapse.
8. Sharing the Spoils: The rat holes would then give the profits they made from selling to Belfort, keeping a small cut for themselves.

This is how Jordan Belfort was able to rake in “almost” a million dollars a week.

Taking the Scheme to New Heights with IPOs#

The scheme got even bigger and more sophisticated when Stratton Oakmont started handling Initial Public Offerings (IPOs) for companies.

An IPO is when a company sells its stock to the public for the very first time, listing on a public exchange. There are lots of rules and regulations involved, but the main benefit for the company is that it becomes much easier to raise money from the public markets.

Usually, companies hire an underwriting firm (often a big investment bank) to guide them through the IPO process. The underwriter helps ensure the IPO is successful, meaning all the shares the company wants to sell actually get sold at or above the agreed-upon price.

Surprisingly, in its peak years, Stratton Oakmont managed to convince a few companies to use their services as an underwriter instead of a traditional investment bank.

You might think that using public exchanges, which have more rules, would slow Belfort down, especially since he liked OTC trading to avoid regulation. But Jordan found a way to combine the best (or worst) of both systems:

1. Pre-IPO Purchase (by Rat Holes): Jordan would tell his rat holes to buy up stock in a company before it went public via an IPO that Stratton Oakmont was underwriting.
2. The IPO Debut: The company’s stock would debut on a public market.
3. The “Pump” (Wider Audience): Jordan would then order his army of brokers to sell the IPO shares aggressively to all their contacts, just like before. This drove up the price rapidly.
4. Attracting Outside Investors: Because the stock was listed on a public market, its sudden price jump (like being “up 50% at open”) would catch the attention of investors who had nothing to do with Stratton Oakmont. They’d see the news and want to jump in on the action.
5. The “Dump” (Leveraging the Hype): The rat holes could then quietly sell their pre-IPO shares into this wider buying “mania” created by both Stratton’s clients and outside investors. This netted them (and Belfort) a very healthy profit.

Essentially, Jordan combined the less regulated environment of OTC operations with the general trust people tend to have in publicly traded stocks to create what’s described as the “ultimate money making scam.”

Identifying the Scheme: The Pump and Dump#

If you haven’t figured it out by now, the scheme described above, both with OTC stocks and leveraged in IPOs, is called a “pump and dump.” This was the core mechanism Belfort used to make millions.

For a while, it seemed like these types of schemes were becoming a thing of the past. The rise of online trading platforms and easier access to market information meant investors weren’t as easily fooled by brokers hyping up some tiny company.

However, unfortunately, the growth of less regulated crypto markets has brought back pump and dump schemes with a vengeance. The difference today is that the “coked-up stockbrokers” have often been replaced by Discord communities and gaming influencers, and the “penny stocks” have been swapped out for things like “dumb trucking meme coins.”

On Hiding the Money#

Another key part shown in the movie was how Jordan hid the money once he made it. That’s a whole other topic. This video doesn’t go into that, but there’s actually an entire separate video covering exactly how you could do that if you ever ended up with a large amount of ill-gotten gains. So, you can check that out if you think that’s something that might happen to you!

(And once again, a special thank you to the channel members and patrons on Patreon for making it possible for everyone to keep learning how money works.)