Coruscation

WSJ:

2. Line Up the Victims: Suckers aren't born, they're trained. Stratton Oakmont's salesmen would first gain the confidence of investors by letting them make a small profit on one or two Stratton IPOs. Once trust had been established, the Stratton salesmen would inform these customers that a really hot IPO was coming soon with a $4 issue price. Like all Stratton IPOs, the stock's price was expected to take off when it began trading in the aftermarket. An excited customer with $100,000 of savings might authorize the Stratton salesman to buy 25,000 shares of the IPO stock, and then transfer the $100,000 to his Stratton account. By totaling up all such commitments, Jordan Belfort knew exactly how much buying power Stratton's customers had.

3. Bait and Switch: Shortly before an IPO, the Stratton salesmen would call these customers and inform them that the IPO was so hot that the salesmen could offer only a (very) few shares at the $4 IPO price. However, the salesmen could create purchase orders to be executed as soon as the stock began trading on the open market. Many customers assumed that such orders would result in stock purchases near the $4 issue price, so they simply agreed. Some balked at giving the salesmen permission to invest their money without knowing the purchase price, or simply refused to buy stock in the aftermarket.

This was when the boiler-room hard sell depicted on screen began. The pressure on customers could be overwhelming, especially since they had already agreed to buy the same stock at the issue price: "What do you mean you don't have the money to invest in this stock? You already gave me $100,000 to buy it at $4 per share!" "I made money for you before, and now you don't trust me?" "I'm never going to let you in on another IPO if you back out on me now!"

The Stratton brokers could have just placed orders in these customers' accounts without their permission, but they rarely did. Unauthorized orders were more likely to trigger complaints to regulators, and the move would have violated some unofficial boiler-room code of honor. These guys took pride in their ability to talk suckers into parting with their life savings.

4. Market Manipulation: Stratton Oakmont could have made millions of dollars just by selling its customers stock in nearly worthless companies for $4 per share, but after a couple of such IPOs, investors and regulators would have caught on. Instead, Jordan Belfort used the stock market to camouflage his theft.

Let's say that one million shares of the IPO stock had been issued, and Stratton's customers had committed to buying $12 million of the stock in the aftermarket. Belfort would therefore want the stock price to rise from $4 to $12 per share before selling it to them. Having bought all of the IPO stock back from the flippers, Belfort and Porush could make the stock trade in the aftermarket at any price. The simplest way to do so was to buy and sell shares between Stratton accounts at increasing prices, but that would have been too obvious. The same result could be accomplished by having friends buy small amounts of stock using "market orders," which buy shares at the lowest price offered from any seller. The only seller was Stratton Oakmont.

As soon as aftermarket trading commenced on IPO day, the friends of Belfort and Porush started placing these small market orders. Stratton would simultaneously sell its stock using "limit orders," which offer stock for sale only above a specified minimum price. After each sale, Stratton would place another (sell) limit order with a slightly increased minimum price, and the friends' market orders would execute at each higher price.

What the market recorded was a steady progression of trades at $4.25, $4.50, $4.75, all the way up to the $12 target price. The run-up from $4 to $12 could be accomplished in minutes. This was a common first-day trading pattern for legitimate hot IPO stocks during the 1990s, so the manipulation wasn't obvious.

5. Sell High and Shut the Door: When the IPO stock price hit the $12 target, Stratton executed its customers' buy orders. This was the payoff moment when Stratton got the victims' money and the movie's over-the-top partying began.

Had customers holding the inflated stock tried to resell it quickly on the market, they would have found almost no real buyers, and the stock price would have plummeted about as quickly as it had risen. Such an early price crash was rare for legitimate IPO stocks and would have attracted regulatory scrutiny and scared away future Stratton victims. So Stratton made a practice of supporting the high price for a while--usually about a month--by buying any of its IPO stock offered for sale on the market.

But letting customers sell their stock for $12 while Stratton Oakmont was the main buyer would defeat the entire purpose of the scheme; the victims had to be discouraged from selling too soon. Stratton brokers could usually do so by heaping more hyperbole onto investors who called to place sell orders. (Stratton operated before Internet self-service brokers like E*Trade ETFC -0.50% enabled most investors to place their own orders).