I have watched the Wolf of Wall street over and over, and every time I watch it, I always try to analyze the fraud that actually went on in the movie. While the movie might look fictional, the author Jordan Belfort mentioned that the movie was loosely based on the book which he wrote with the same title as the movie which was loosely based on reality, so we could say it has specs of reality in it.
Jordan Belfort began his career when he was layoff from the NewYork Based Stock brokerage firm L.F Rothschild & Company. According to the movie we can tell now that buying stocks then isn't the same as now where we can use Brokers like Robinhood, and E-Trade to buy stocks by just clicking on the ticker symbol as well as selling as easily as pressing the sell button. At the time, you would have to call the Stock Broker in the Brokerage firm, giving them explicit instructions to buy or sell a particular stock but while this happens, it doesn't happen most of the time rather it was the stockbrokers being on the call pitching to people on what stocks they should buy or sell.
While the stockbrokers do not really know much about the market movement, they will continue to call their clients to buy or sell a particular company or the other and they do so with the aim of getting commission on what ever trade they make and those times, trades could commission could cost up to 2% the amount of the asset being traded with the company getting 1% and the broker getting 1%.
Belfort in the movie worked as an over the counter broker which is completely different from the brokerage he worked for before that had reps in the floor of NYSE who gets trade information from their brokers to the exchange. If the exchanges notice any behavior that was unethical, the brokerage firm would be removed from the floor. The exchanges were responsible for auditing the financial statement of brokers, and they regulated what was being listed on them.
To facilitate his dealing, he created Stratton Oakmont Inc, which is a subsidiary of Stratton Securities Inc which was a brokerage company that dealt in OTC and with Exchanges. What they did in this company was to sell stocks they already bought heavily or asked their investor friends to buy and when these people begin to buy them, they begin to sell the stocks they previously owned.
When Stratton Oakmont Inc started taking companies public, the main money began to trickle in. He would ask his rat hole investors to buy up the stocks in the company before he takes them public, then when it becomes public, his brokers would sell the stocks to their contacts while his rat hole investors begin to sell their stocks as the price increases. It will not be visible because people outside his broker's contact will also be able to access the stocks. He was able to use his unregulated OTC to make gains when his backyard investors sell off and they share profit, just like the pump and dump.
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