The Cthulhu of Wall Street

Jacob Harper  |

One of the more highly-anticipated movies about the financial world in years will descend on the American public on Christmas: The Wolf of Wall Street; loosely based on the life of late 80s/early 90s chop shop Stratton Oakmont’s CEO Jordan Belfort. Meanwhile, in the present day hedge fund SAC Capital has been shown to have engaged fraud several magnitudes larger than Stratton Oakmont, in the form of several instance of insider trading. But why do they not get nearly the same amount of attention?

Stratton Oakmont: Small Potatoes

Stratton Oakmont was a Long Island-based chop shop, a typical boiler room that moved thousands of penny stocks and OTC plays in tried-and-true pump-and-dumps. That is, they sold worthless stocks to neophytes via cold calls, artificially inflated the price then sold all of their own shares, rendering the investors share’s worthless.

While there’s no question that Belfort was a letch, and did indeed net million through his classic retail investor-bilking methods, in the scheme of things he was doing chump change.  Not to downplay the real lives that got ruined, but when it comes to ripping people off Stratton Oakmont was a puppy. If Belfort was the “Wolf,” SAC Capital is Shiva, Destroyer of Worlds.

Of course that’s a bit of an exaggeration, but comparing the chicanery of the two reveals a pretty wide gulf in magnitude.

SAC Capital: Ginormous Potatoes

Stratton Oakmont was found to have swindled roughly $100 million out of the public, and Belmont was ordered to personally repay some $110 million to bilked investors.

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Now let’s look at SAC Capital. In June of this year, the company was ordered to pay out $1.8 billion, with $900 million coming in fines and $900 million in restitution. This is to say nothing of SAC Capital head Steve Cohen, who has been under investigation by the SEC for five years. And if his compatriots are any indication, it’ll be quite a haul.

On Dec. 18 SAC Capital portfolio manager Michael Steinberg was found guilty of five counts of securities fraud relating to insider trading on Dell Inc. (DELL) stock. Another SAC associate, Martin Martoma, is accused of using insider information to save SAC Capital $276 million in losses. If found guilty, restitution from this deal alone could far exceed Stratton Oakmont’s entire haul, even after being adjusted for inflation.

So why does a pump-and-dump like Stratton Oakmont get so much attention, when much larger schemes like those perpetuated by SAC Capital get very little. Most likely, it’s the fact that finding the victim in insider trading isn’t as clear as with a pump-and-dump. But it’s all the same: the insder wins while the retail investors lose.

Insider Trading Isn’t Victimless

With a pump-and-dump, it’s pretty obvious who the victims are. A company like Stratton Oakmont inflates a stock through hype, then sells at maximum inflated valuation, leaving the retail buyers with worthless stocks. Classic theft.

When companies like SAC Capita, it’s a little more nebulous. But make no mistake, with insider trading, the end game is still the same: get out (or get in) before the average investor has time to react.

l get fed information and dumped shares before the investing public had a chance to buy or sell at the “correct” price, they are taking money out of retail investor’s pockets. Those losses SAC Capital saved? They get invariably passed down to someone. It’s not like that saved loss is created out of thin air.

SAC Capital’s scheme is less sexy than Stratton Oakmont’s, but it’s much larger. It  might not make for as good a movie, but insider traders do real damage on Wall Street – way more than any Wolf can.



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