1

Case Assignment: SEC vs. Stratton Oakmont

(Civ. A. No. 94-2681 (JHG)., 878 F.Supp. 250 (1995))

Stacey Troup

Business Law/MGT-320

March 22, 2017

Dr. Adriana Reza

2

Case Assignment: SEC vs. Stratton Oakmont

For this midterm case assignment, I will prepare a summary of the business and legal

issues surrounding this case made popular by the movie “The Wolf of Wall Street”. Whie the

movie was loosely based on the life of Jordan Belfort and his firm, Stratton Oakmont, this

narrative will stray from the movie “puff” and focus more on the ethical and business issuStes

surrounding the illegalities committed by Belfort as well as his staff during this landmark case.

Additionally, I will discuss how investment banks like HSBC continue to ignore legal

regulations and AML Laws while continuing to get into hot water with the regulatory agencies

over their business practices, not vastly different from those exhibited by Stratton Oakmont back

in the 90s.

Stratton Oakmont – The Firm

Founded by Jordan Belfort, a former meat salesman from long island, this brokerage

house set out with the business model that brokers do not hang up the phone until the client

“buys or dies” (Leonard, 2008). Accurately depicted in the film, he and partner Daniel Porush

began the firm with the overzealous strong arm sales tactics passed down to their broker dealers

as a necessity to success. Utilizing scripts constructed by the duo, these brokers often committed

fraud toward their customers by pushing penny stocks for a lot more than their true trade value,

in violation of the Securities Exchange Act of 1934 (Securities Exchange Act of 1934

(Amended), 2012). Additionally, the firm operated a money laundering scheme with the help of

friends and family by moving money into Swiss bank accounts to avoid AML (Anti Money

Laundering) reporting standards in the U.S. (Securities Exchange Act of 1934, N.D.).

In 1991, Forbes did an artile (unavailable) on Jordan Belfort, referring to him as a "kind

of twisted Robin Hood who takes from the rich and gives to himself and his merry band of

3

brokers" (Leonard, 2008). This “pump and dump” scheme they perpetrated resulted in massive

profits to the firm and occasionally ruin for their customers as they illegally inflated penny stock

prices as value based stocks to buy (Pump and Dumps, 2013).

As the firm’s profits grew, so did the appetites for drugs, fraud, and other illegal activities

for the partners. They released their first IPO, Madden Shoes, the whole time committing stock

manipulation and fraud across the organization – including with their partner, Steve Madden. In

total, Stratton Oakmont and Steve Madden were found guilty of stock manipulation in 22 IPO’s

(initial public offering(s)) over the history of the firm (News Item: Steve Madden Settles SEC

Fraud Charges, 2001). In addition, they were charged with unauthorized trading in customer

accounts, and “knowingly or recklessly manipulating the market price of Nova Capital, Inc. by

dominating the market (IPO) and engaging in fraudulent sales practices” (SEC vs. Stratton

Oakmont, 1995). The firms’s principles were also charged and suspended from trading

activities, indefinitely, because of the massive fraud perpetrated on behalf of the firm (Initial

Decision in the Matter of Richard J. Puccio, 1995), (Initial Decision: Porush & Sanders (Stratton

Oakmont), 1998)

The Case(s): SEC vs. Stratton Oakmont

SIPC vs. Stratton Oakmont

In 1992, the FBI, NASD (National Association of Securities Dealers) and the SEC

(Securities and Exchange Commission) began separate investigations into the business practices

of Stratton Oakmont, a registered broker of stocks located in Long Island, New York. The

investigations stemmed from their belief that the firm committed securities fraud, money

laundering, stock manipulation, various fraud, and organized crime tactics – to name a few (SEC

vs. Stratton Oakmont, 1995). In a plea deal, Stratton Oakmont owner, Jordan Belfort, pled guilty

4

to securities fraud and money laundering in exchange for a reduced sentence. During this time,

the SEC had agreed to drop their charges in favor of those stemming from the FBI. Belfort,

however, welched on his agreement with the FBI and was subsequently charged (and pled guilty

to) securities fraud and money laundering, was sentenced to four years (of which he served 22

months) in jail and considerable corporate and personal fines (Jordn Belfort - Trouble With The

Law, N.D.).

This was the first of many lawsuits both regulatory and corporate for the firm and

following the order to pay fines both corporate ($10 Million) (Former Stratton Execs Fined

$10M, 1997) and personally (Belfort $110 Million) (Leonard, 2008), the executives were

ordered to liquidate the business and give the profits from sale to the restitution accounts of their

victims (Stratton Oakmont Ordered to Liquidate, 1997; SIPC vs. Stratton Oakmont, 1999) in

accordance with The Securities Investor Protection Act of 1970 (Securities Investor Protection

Act SIPA, N.D.).

Permanent disbarment from the Securities industry for many of the executives,

dissolution of the firm and even jail time. A pretty hefty fine to pay for this level of fraud they

perpetrated against the american investors.

IPO Partner Fraud

SECURITIES AND EXCHANGE COMMISSION V. STEVE MADDEN,

01-CV-3311(JG)(E.D.N.Y.)

As publicized in the film, Stratton Oakmont did its first IPO (initial public offiering) of a

company stock with Steve Madden Shoes. What was not detailed was Madden’s personal

involvement in the fraud and stock manipulation perpetrated by its broker, Stratton Oakmont. In

2001, Steve Madden was found guilty of (though no admission of guilt was entered) stock

5

manipulation and fraud in concert with Stratton Oakmont’s offering of his company stock. In

addition to manipulating his own IPO stock price, he was also found guilty As part of this SEC

charge, Madden himself was banned from acting as a company director or officer of a publically

traded company along with more than $7.8M in fines (News Item: Steve Madden Settles SEC

Fraud Charges, 2001).

Madden was found guilty of acting as a “flipper” of his stock by selling back to either

Stratton or personal acquaintences, in an effort to inflate the price of the stock to the firms

customers. Additionally, he had an agreed-upon profit with Stratton Oakmont for this “flipping”

of his company stock which was also illegal. These transactions were done through sale but

failed to report the sale of stock (News Item: Steve Madden Settles SEC Fraud Charges, 2001)

per the Securities and Exchange Act of 1934 (Securities Exchange Act of 1934 (Amended),

2012) as well as the Securities Investor Protection Act of 1970 (Securities Investor Protection

Act SIPA, N.D.)

The Securities Exchange Act of 1934

In 1934, President Franklin D. Roosevelt signed (amended) Securities Exchange Act

(originally put into place in 1933) in response to the belief that irresponsible actions caused the

stock market crash of the 1920’s (Securities Exchange Act of 1934, N.D.). The Act has many

components which include reporting standards, proxy solicitation, margin and audit requirements

for companies who are registered in this capacity (Securities Exchange Act of 1934, N.D.).

Stratton Oakmont (and Steve Madden) violated several of the Sections to this Act including Sec.

8 – Restrictions on Borrowing by Members, Brokers and Dealers; Sec. 9 – Prohibition of the use

of Manipulative and Deceptive Devices; Sec. 7 – Margin Requirements; Sec. 11 – Trading by

6

Members of Exchanges, Brokers & Dealers; and Sec. 24 – Public Availability of Information

(Securities Exchange Act of 1934 (Amended), 2012).

The Act requires honesty in operations of all persons acting in a capacity within a

publically traded firm. Additionally, reporting requirements for transparency are paramount to

ensuring that companies are not participating in insider trading as they give a visibility into the

actions of the firm (Securities Exchange Act of 1934, N.D.).

The Securities Investor Protection Act of 1970

The Securities Investor Protection Act of 1970 was enacted, primarily, to protect the

interests of the investors in the event of liquidity issues with the brokerage firm in question. It

allows for the transferring of accounts should a brokerage firm go bankrupt into another entity.

Should there be no transfer available, the firm in question is liquidated in conjunction with U.S.

Bankruptcy Courts and funds transferred in accordance with fair market value of stock at the

time of liquididation. This, however, requires a formal application of protective decree with the

Bankruptcy Courts in order to be enacted (Securities Investor Protection Act SIPA, N.D.). The

SEC is responsible for overseeing the regulatory and supervisory actions of the SIPA, ensuring

all applicable trade laws are followed during the transactions.

Anti Money Laundering (AML) Regulations

AML regulations must be followed by every firm working in financial services. These

reegulations ensure that no terrorist cash flows are being invested in U.S. entities and that the

money coming from investors is “clean”. To ensure this, the FINRA requires transcations to be

conducted into the background of the investors finances by a Compliance Professional who is

licensed under FINRA guidelines and who adheres to regular continuing educational

requirements (Anti Money Laundering, N.D.).

7

Modern Day Mayhem

USA v. HSBC Bank USA, N.A. et al Case No. 1:12-cr-00763-JG

While small firms such as Stratton Oakmont were brought to their knees with both legal

and punitive damages for violating trade rule, many larger financial institutions are continuing

their illegal practices regardless of the fees they are charged or the charges brought against them.

The most noteable of these companies is HSBC Bank.

According to court documents, between 2006 and 2010, HSBC failed to provide

necessary AML Compliatory controls to ensure investors money was “clean”. Instead, they

ignored these regulations and allowed Mexican and Columbian drug cartels to launder over $881

Million dollars in profits through their branches. Additionally, they were charged with dealing in

payment processing schemes from countries known for their high fraud and, therefore, barred

from U.S. and foreign investments (U.S. vs. HSBC Bank, 2013).

For HSBC’s responsibility in this act of fraud and AML violations, they were fined $1.9

Billion (USD) for money laundering and while criminal charges were filed against HSBC Corp,

(deferred to 2016), no charges against individual executives for this unethical behavior have

occurred (HSBC to Pay 1.9B, 2012). For their clear involvement in this money laundering

scheme, one must ask themselves why HSBC wasn’t held to the same standards as those at

Stratton Oakmont.

Conclusion

While smaller firms such as Stratton Oakmont were barred by the NASD and must pay

restitution of future earnings until all money is paid to their defrauded investors, one can only

wonder why big banks, after the fraud of the equity markets crash, are not held to the same

standards as these smaller firms.

8

Stratton Oakmont and its principles clearly participated in more than one illegal process

and paid heavily for their actions yet big banks just pay their fines and move on. HSBC has been

named in at least 3 other lawsuits relating to their trading or sales activities yet they continue to

operate in business daily. Where are the ethical standards of the SEC, NASD and FBI when it

comes to big banks or have they adapted the “too big to fail” monacre?

At the end of the day, all investment firms need to comply with the laws and be held to

the same standards as other firms. There should be no “special handling” of larger banks

because of the negative impact on financial markets, instead there should be consequences equal

to other firms for their actions. HSBC should have been banned from the securities industry and

the forced liquidation of those branch locations responsible for these illegal actions. Jail time

should have come to the executives who signed off on these investment allowances and trades as

they violated the laws as much as the people who allowed them to happen in the first place. We

need to get to a point of ethical business practices and stop bailing out banks who do illegal

things and violate AML, Securities Investor Protection Act, and the Securities Exchange Act of

1934.

If the American public is to trust their financial institutions they must trust that

appropriate consequences will be given to those who attempt to defraud them. As of today, it

does not seem that this is the case and big banks can often violate the law, pay their fees, and

continue to perpitrate fraud, corrutption and money laundering schemes.

9

References

Anti Money Laundering. (N.D.). Retrieved from FINRA: http://www.finra.org/industry/amlFormer Stratton Execs Fined $10M. (1997, 04 18). Retrieved from Securities Arbitration:

http://www.securitiesarbitration.com/news/1997/04/18/former-stratton-execs-fined-10m/HSBC to Pay 1.9B. (2012, 12 11). Retrieved from Reuters: http://www.reuters.com/article/us-

hsbc-probe-idUSBRE8BA05M20121211Initial Decision in the Matter of Richard J. Puccio. (1995, 07 10). Retrieved from SEC:

https://www.sec.gov/litigation/aljdec/1995/id-68grl.pdfInitial Decision: Porush & Sanders (Stratton Oakmont). (1998, 10 26). Retrieved from SEC:

https://www.sec.gov/litigation/opinions/3440600.txtJordn Belfort - Trouble With The Law. (N.D.). Retrieved from Biography:

http://www.biography.com/people/jordan-belfort-21329985#trouble-with-the-lawLeonard, T. (2008, 02). Jordan Belfort Confssions of the Wolf of Wall Street. Retrieved from

Telegraph: http://www.telegraph.co.uk/news/features/3635727/Jordan-Belfort-Confessions-of-the-Wolf-of-Wall-Street.html

News Item: Steve Madden Settles SEC Fraud Charges. (2001, 05 23). Retrieved from SEC: https://www.sec.gov/news/headlines/maddensettles.htm

Pump and Dumps. (2013, 06 25). Retrieved from SEC: https://www.sec.gov/fast-answers/answerspumpdumphtm.html

S.E.C. vs. Stratton Oakmont. (1995, 02 28). Retrieved from Leagle: http://www.leagle.com/decision/19951128878FSupp250_11061/S.E.C.%20v.%20STRATTON%20OAKMONT,%20INC.#

SEC vs. Stratton Oakmont. (1995, 02 28). Retrieved from Justia Law: http://law.justia.com/cases/federal/district-courts/FSupp/878/250/1439881/

Securities Exchange Act of 1934 (Amended). (2012, 08 12). Retrieved from SEC: https://www.sec.gov/about/laws/sea34.pdf

Securities Exchange Act of 1934. (N.D.). Retrieved from Investopedia: http://www.investopedia.com/terms/s/seact1934.asp

Securities Investor Protection Act SIPA. (N.D.). Retrieved from US Courts: http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/securities-investor-protection-act-sipa

SIPC vs. Stratton Oakmont. (1999, 01 13). Retrieved from Leagle: http://www.leagle.com/decision/1999502229BR273_1460/S.I.P.C.%20v.%20STRATTON%20OAKMONT,%20INC.

Stratton Oakmont Ordered to Liquidate. (1997, 01 30). Retrieved from New York Times: http://www.nytimes.com/1997/01/30/business/stratton-oakmont-ordered-to-liquidate.html

U.S. vs. HSBC Bank. (2013, 07 01). Retrieved from Scholar.Google: https://scholar.google.com/scholar_case?case=9484782110347120803&hl=en&as_sdt=6&as_vis=1&oi=scholarr