Belfort and his accomplices fine-tuned his signature fraud through dozens of repetitions. Here’s how it worked, in five easy steps:
1. Create IPO Stock: The first thing Stratton Oakmont needed was a business to sell, and the definition of “business” was very flexible. A judo school, a bagel maker, a newfangled water purifier, or a recovering alcoholic selling shoes out of the trunk of his car would do. What was needed was not so much an actual business as a business entity with a story that could be converted into publicly traded shares of stock through a Stratton initial public offering.
An important element of the scheme was that the Stratton IPO stock was not really sold to the public—it was sold to Stratton. Securities laws forbid underwriters like Stratton from buying more than a small percentage of the IPO stock they issue. To avoid this roadblock, Stratton sold all of its IPO stock to friends (nicknamed “flippers”) like Madden, who immediately sold the stock back to Stratton for a small profit. The IPO stock was usually issued to the flippers at $4 per share, and then sold back to Stratton for $4.25 per share. This was a pretty nice deal for the flippers, who could pocket $50,000 or so from an IPO without breaking a sweat or risking a loss.