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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony,

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To: eims2000 who wrote (68893)3/25/2001 10:43:14 AM
From: Anthony@PacificRead Replies (1) of 118877
 
Jordan Belfort Crossed me and this is what happened to him::

Sunday, March 25, 2001
6:50 AM
Jordan Belfort

PREVIOUS COVERAGE

• 3/15/98: A License to Cheat You
• 3/16/98: Troubled Legacy
• 8/10/98: The Shoemaker and the Broker
• 12/20/98: Many Unhappy Returns
• The Charges Against Jordan Belfort and Daniel Porush





Castles Made of Sand
Brokers who rode fraud to riches now federal witnesses


by Susan Harrigan
Staff Writer

First of two parts


The founders of the biggest, most infamous stock "boiler room” in recent history met when they rushed to help a child who had fallen off a playground slide at the Bay Club condominiums in Bayside.

Jordan Belfort and Daniel Porush, who both lived at the Bay Club, fell into conversation on that Sunday in December 1988 and Belfort soon mentioned that he was making $50,000 a month selling small stocks at Investors Center, a brokerage in Hauppauge.

"That was over 10 times more than I was making,” Porush said later. Within two days, he visited Investors Center, thought "I can do this,” closed his own ambulette service business and went to work with Belfort.

The pair would go on to create Stratton Oakmont, a Lake Success-based brokerage that cheated thousands of individuals out of about $250 million, spawned "rogue” brokers who spread its methods to other firms, exposed holes in the nation's safety net for investors and made a mockery of securities regulators who tried to stop it.

When Stratton opened in June 1989 Belfort and Porush decided almost immediately that "nothing worked but fraud,” Belfort said. So the pair concocted a sophisticated scheme to inflate the prices of stocks and sweep the profits into their own pockets, financing what they called a "broker Disneyland” that included mansions, a yacht, golf at world-class courses and dazzling parties featuring charcoal pits full of lobster tails.

But their sunlit existence hid a darker reality. Both brokers used drugs heavily, and Belfort injured his wife and risked hurting his daughter during one drug-fueled incident. Richard Walker, director of enforcement for the U.S. Securities and Exchange Commission, said he was "humbled” by the seven years it took to close Stratton, which hired top legal talent to fight the civil penalties that are the mainstay of the nation's system of stock regulation.

"The big lesson is that vigorous criminal enforcement is critical to stopping these things,” Walker said. "The civil regulatory process takes too long.”

But developing a criminal case against Belfort and Porush took a long time, too. Protected by a tight-knit group of friends and associates, they weren't arrested until September 1998, almost two years after Stratton closed. They have pleaded guilty to stock fraud and international money laundering.

Now the two men, who have remained mysterious figures despite Stratton's notoriety, are telling their stories in court as star witnesses for the prosecution in the trials of several alleged Stratton accomplices.

From testimony, as well as interviews and documents, Newsday has pieced together the first detailed account of how two middle-class men from Queens and Long Island took advantage of naive investors flooding into the great bull market of the 1990s to build Gatsby-esque lives of lavish parties, travel and expensive toys -- only to see it all undermined by their own overwhelming avarice and dishonesty.

Becoming an honest businessman "was something that was always in my mind, every day,” Belfort said. "I was too greedy to stop.”

In coming months, the credibility of Belfort and Porush will be vital to deciding whether a number of people, including one of America's most prominent footwear designers, go to jail. In an unprecedented effort to prosecute alleged insiders in small-stock schemes, the government has accused four people, including Steven Madden, founder of Long Island City-based Steven Madden Ltd., of helping the two ex-brokers commit fraud.

The trial of another alleged Stratton accomplice, New Jersey accountant Dennis Gaito, ended in a hung jury in November. Gaito is to be retried in April, and Madden's trial is scheduled for May.

The other individuals accused of helping Belfort and Porush are Harry Shuster, former head of the company that operates Grand Havana cigar clubs, who will be tried in July, and Elliot Lavigne, a former fashion executive, for whom no trial date has been set. All have pleaded innocent.

Although prosecutors say it's common to use admitted felons as witnesses, some defense attorneys say Belfort and Porush aren't believable by juries. The two are hoping to mitigate prison sentences that could total more than 20 years, and by their own admission they are chronic liars.

"We lied to stockbrokers. We lied to customers. I lied to the government when being investigated. We lied to each other,” Belfort said at the Gaito trial.

The two men have lost their families, their friendship and their golden business touch. While awaiting sentencing, Belfort has been running a troubled nutritional products business. Porush sells sports memorabilia.

Beyond their testimony in the Gaito trial, neither would comment for this story. Gregory O'Connell, an attorney who represents Belfort, said his client "deeply regrets his wrongdoing,” which caused "a catastrophe in his life.” Charles Stillman, a lawyer for Porush, said the ex-broker feels "great remorse” for what he did during "a bad stage in his life.”

Princes of ‘Pump and Dump'
People who are familiar with the reputations of Belfort and Porush and meet them for the first time have sometimes commented with surprise that the two look like choir boys. It's a reference to their relatively slight statures and youthful looks, but also to the fact that they resemble what they are -- two products of the American mainstream.

Belfort, 38, is dark-haired, baritone-voiced and possessed of considerable charm in contrast to the light-haired, sandy-voiced and more brusque Porush. The son of two accountants, Belfort was born and raised in Bayside, attended Bayside High School, and graduated with a major in biology from American University in Washington, D.C.

After dropping out of the Baltimore College of Dentistry after three months, Belfort worked as a meat salesman and then owned and ran Manchester Farms Meat and Seafood Co., a now-defunct Woodside-based business that delivered its products door-to-door. But he expanded too quickly, declared personal bankruptcy and in 1987 began working at a series of brokerages that sold small stocks.

Porush, whose father is a doctor, was born in Brooklyn. He grew up in Lawrence and graduated from Woodmere Academy in 1975. The inscription under his senior class yearbook picture paraphrases Mae West -- "whenever I have to choose between the better of two evils, I choose the one I haven't tried yet.” After attending Dickinson College and Boston University for a total of four years and a summer, Porush left without a degree, worked as a courier, and had just started an ambulette service when he met Belfort.

After Investors Center closed, Belfort and Porush used space in a friend's car dealership to open a branch of the firm that eventually became Stratton Oakmont, using customer leads stolen from their previous employer. By late 1989, they and a partner who had worked in Belfort's meat business had purchased the parent brokerage and relocated to an office building on Marcus Avenue in Lake Success.

Belfort said he and Porush quickly realized they couldn't succeed honestly. "My expertise was in sales. I didn't know how to trade stocks, or find and structure deals,” he said. "It was a very seedy world in the over-the-counter market... People popped out of the woodwork” suggesting dishonest deals.

Working with small firms that they found or that were referred to them by acquaintances and promoters, the two men perfected a fraudulent technique of bringing companies public. Stratton became what John Coffee, a Columbia University securities law professor, called "the best-known example in history of a pump-and-dump scheme.”

Such a scheme requires getting control of the supply of a stock being offered to investors so that no one will sell too early and thereby lower the price. Then the firm artificially increases demand and runs the price up (the pump) by having hundreds of salespeople call investors all over the country and make false promises about the stock's performance.

Once the price rises, insiders sell out (the dump) and leave the public holding nearly worthless shares.

Flippers, Ratholes and Big Shots
Stratton achieved control of a stock's supply partly by selling a huge chunk of each company's initial public offering, or IPO, to three types of insiders it called "flippers,” "ratholes” and "big shots.” Most had secret arrangements about when they would sell, which are illegal under U.S. securities laws.

Flippers were individuals who bought stock in an offering with a secret agreement that they would sell it back to Stratton immediately after trading opened, for a profit of about 25 percent.

Ratholes, also called nominees, were people who bought stock at the low offering price as fronts for Belfort and Porush, who were, as Stratton principals, forbidden by securities laws to invest in their own IPOs. Later, after the price had been manipulated as high as possible, the nominees would sell out for a high price on the public market and split the profits with Belfort and Porush.

Stratton offerings frequently doubled in price, or better, before such selling took place.

Big shots included golf pros, restaurant owners, friends, family members and others for whom the brokers wanted to do favors. Also called "preferred clients,” they sold on the public market at a higher price than flippers but at a lower price than ratholes.

Stratton's creators also controlled the supply of stock in public offerings by allowing some friends and acquaintances to make loans to companies they were bringing public. The loans were convertible into stock, which ostensibly was subject to "lock-up” agreements that it couldn't be sold for a substantial period of time without Stratton's consent. In fact, the lenders already had secret agreements to sell the stock back to Stratton within days or hours after an offering, prosecutors said.

Federal prosecutors have accused Steven Madden and Elliot Lavigne of acting as flippers, nominees and lenders who violated securities laws in domestic stock manipulations by Stratton. Porush also said at the Gaito trial that the "big shots” in Stratton offerings included a number of executives at Steven Madden Ltd. Participating in Stratton offerings "was part of the package at Steven Madden,” Porush said. "It was a nice enticement to join his firm.”

Steven Madden Ltd. declined to comment on Porush's statement and no one else at the company has been charged.

Once a huge chunk of a stock offering had been disbursed to insiders, hundreds of salespeople in a large room at Stratton called "the boardroom” sold the rest to outside investors, using high-pressure sales tactics and scripts containing fraudulent statements to drive up the price.

The scene in the boardroom was pure bedlam, according to people who witnessed it. With no space between desks, "guys were on top of one other,” said one investor who arrived at Stratton unannounced. "It was like a sweatshop.”

Brokers and cold-callers (people who call strangers whose names have been culled from lists) stood on their desks and screamed into telephone headsets. The noise was "so bad you thought you were in the middle of the Chicago Stockyards,” one former Stratton broker said. Before every offering, Belfort and Porush appeared in the boardroom to whip up enthusiasm and urge salespeople not to take "no” for an answer.

"They were powerful speakers and had golden tongues,” said one former Stratton broker, who didn't want to be named. "They wore thousand-dollar suits. They'd stand in front of the boardroom with microphones and feed us a line you wouldn't believe. They'd say, ‘This is broker Disneyland. People are only coming after us because they're jealous.'”

"The common saying at Stratton was ‘deal and burn,'” said a former Stratton cold-caller. "The guys on the phone were taught to lie... I personally pushed a Kentucky guy into a deal simply by yelling at him during my second week.” To build up their aggression, he said, brokers and cold-callers would break baseball bats in half and wrestle, sometimes throwing each other across the room. Supervisors would tell cold-callers that the people on the other end of the line were "all big and all in the market.”

Stratton also motivated brokers by paying them big bonuses on sales of stocks it wanted to pump. "There were 19-year-old guys in the room with no education, with $100,000 to $200,000 in their pocket... who owned five or six exotic cars,” the former cold-caller said. The wife of a former Stratton broker remembers her "wonderful feeling” when her husband brought home a $15,000 paycheck after one public offering.

Stratton's frenzied sales tactics succeeded partly because of a middle-American fascination with stocks, and especially IPOs, that developed as the bull market gathered steam in the early 1990s, said Joseph Borg, Alabama securities commissioner and head of a multi-state task force that investigated the brokerage. "They were really ahead of their time seeing the trend of Americans getting into the markets,” Borg said of Stratton's creators.

Belfort said it was so easy to sell IPOs that he got a speeding ticket dropped in 1990 by telling a policeman he owned a brokerage firm. "He agreed to forget the tickets if I would make him money in the stock market,” Belfort said. "He then told a couple of his friends about it, and about four police officers ended up opening accounts at Stratton Oakmont and receiving new issues, making money.”

Pits Full of Lobster Tails
All those investor dollars supported lifestyles for Stratton's two top honchos that at times seemed to resemble scenes from the 1987 movie "Wall Street.”

Belfort, who made at least $50 million from Stratton during its seven-year life, held parties for employees at his home in the Hamptons that one former Stratton worker said were "kind of like a teaser -- all this could be yours if you work hard.” People who attended said Belfort served gourmet food, including caviar and pits full of lobster tails, dispensed unlimited top-shelf liquor, and offered swimming in his pool and at a nearby beach.

Belfort owned a Westhampton home that he bought for about $1 million and later sold, and a Southampton property for which he paid $5.5 million. His main residence was a gated mansion on several acres in Old Brookville. When he turned over the Old Brookville and Southampton properties to the government in 1998, Belfort said they were worth a combined $11 million.

His fleet of cars included a Mercedes-Benz, a Porsche and a Ferrari. He was driven to work in a limousine, complete with a bar and television set. He wore a Bulgari watch, and his wife, Nadine, a former model, had accumulated so much jewelry that she was able to turn over more than $800,000 worth of it to help make his 1998 bail.

Then there was something even the "Wall Street” character Gordon Gekko didn't have -- a 166-foot-long motoryacht originally built for the French designer Coco Chanel and remodeled by a Texas millionaire before Belfort bought it in 1993. It had a helicopter, seaplane, kayaks, personal watercraft and a trap shooting gun used for shooting at clay pigeons. After it sank in the Mediterranean in 1996, Lloyd's of London, the yacht's insurer, paid Belfort between $6 million and $7 million.

Porush, who said he made about $30 million from Stratton frauds, led a slightly less ostentatious, but still affluent, life. He owned a home in Oyster Bay Cove, a house on Dune Road in Westhampton Beach and a condominium in Palm Beach, Fla. Like Belfort, he had a taste for expensive cars, driving at least two Mercedes-Benzes, two BMWs, a Porsche and a Bentley.

For all the possessions, loose money was plentiful. Belfort, who kept money in sock drawers as well as a safe, regularly ordered $100 bottles of wine and once bought Gaito, the accountant, a $5,000 bottle. One ex-employee said that as a prank, Belfort offered colleagues $10,000 if they would shave their heads. And Porush told federal investigators that while the yacht was sinking, Belfort, who was on board with his wife, called and told him there was between $5 million and $10 million buried in the yard of his Old Brookville home that Porush could use to take care of Belfort's children. Belfort denied burying any money.

The two men took lavish trips. One, on a chartered jet paid for by Stratton, included a stopover in Scotland to golf at two world-famous courses, Turnberry and Troon, on summer days when it was light until midnight. Belfort once rented all of Castle Ashby, a 26-bedroom manor in Northamptonshire, England, to house friends and family members during a vacation. He also took brokers on gambling trips to Las Vegas and Atlantic City.

And remembering the less fortunate, in January 1992 Stratton gave $100,000 to a child-abuse prevention center in Woodmere. "Anybody that has a business on Long Island and is successful has an obligation to give something back,” Belfort told Newsday at the time.

The SEC and the Golden Crowbar
But cracks were developing in Stratton's façade. In March 1992 the Securities and Exchange Commission filed suit in federal court in Manhattan accusing Stratton and some of its principals, including Porush and Belfort, of abusive sales practices, market manipulation and unauthorized trades.

Instead of settling the charges and paying a fine, as most brokerages do in such a situation, Stratton embarked on an odyssey of delay and litigation. It hired top legal talent and fought the charges until February 1994 when, on the brink of a court trial, it finally settled with the agency without admitting wrongdoing.

Although it had originally demanded $11 million, the SEC settled for $2.6 million from Stratton, and fined Belfort, Porush and another principal $100,000 each. It also permanently barred Belfort from the securities business, forbade Porush from acting as a supervisor for a year, and ordered the firm to hire an SEC-approved independent consultant to review its operations and recommend changes.

The result: Stratton had its "best year ever” in 1994, according to Porush, turning out seven more manipulated initial public offerings between February and the end of the year. "We came out just great,” Porush said. "In our minds, we won.” Despite his bar from the securities industry, Belfort spoke to Porush every day and approved all deals.

The SEC consultant, Carl Loewenson Jr., didn't have the power to subpoena records or compel testimony, and Stratton personnel deliberately misled him. One former Stratton employee said he and other salespeople would simply sweep everything incriminating off their desks and watch their language whenever Loewenson and other SEC personnel walked in. The minute they left, it was business as usual.

"The leader would go to the front [of the room] and say, ‘We've got more money than they make in a year,'” the former Stratton employee said. "There was disrespect for the SEC.”

At the request of Stratton Oakmont, a federal judge ordered most of Loewenson's report to be kept sealed until last fall, when it was made public at the request of attorneys for Harry Shuster, one of the alleged Stratton accomplices. According to the report, Loewenson noticed violations including "flipping” agreements, sales scripts containing illegal price predictions, and a cold-caller verbally abusing a customer by saying, "You have two ears to listen and one mouth to talk. Why don't you shut up and listen?”

The report also noted that the supervisor who was supposed to make sure brokers complied with securities laws had been named in at least 22 customer complaints, more than twice as many as the broker with the next-highest number.

It was "troubling,” the report said, that hanging on the wall behind that supervisor's desk was a "Golden Crowbar” award. Among stock fraud perpetrators, to "crowbar” someone means to deliberately spoil their trade.

Before settling with the SEC, Porush and Belfort had agreed to a noncompete agreement under which Stratton would pay Belfort $180 million, in equal monthly payments of $1 million, for 15 years. Because the two had known at the time that Belfort would be barred from the securities industry and thus unable to compete, the agreement was a sham and "simply a way to funnel illegal profits to me,” Belfort said.

The duo also had developed a new business plan. While Porush ran the firm's day-to-day operations, Belfort would find new ways for the two of them to make money. Belfort was interested in running Dollar Time, a Hollywood, Fla., company he controlled that owned dozens of variety stores selling items for $1.

"For me, being in the fraud business, it was enticing to actually try to have a legitimate business,” Belfort said. In 1994, he came back to Stratton as a Dollar Time executive for a "road show” designed to whip up broker enthusiasm for selling the company's stock. "He was a legend to the brokers, so they got all excited,” Porush said.

But Belfort said he soon realized that "someone defrauded me” at Dollar Time. He said someone connected with the company "looted” it but he covered up the theft because "the SEC might think I took it.” Eventually, he said, he lost $1.5 million he had invested in Dollar Time along with as much as $2 million invested by his friends.

Ultimately, Dollar Time was to cause more grief for Belfort and Porush. A money-laundering scheme involving that company was the Achilles' heel that allowed another two-man team -- an FBI agent with a penchant for making charts and a Brooklyn prosecutor with European connections -- to arrest the two Stratton principals on charges so serious that they turned state's witnesses.

For now, however, Belfort became interested in making B-movies. In early 1995 he moved to Los Angeles to be a producer, working with Shuster and one of Shuster's sons in a film company they ran. Their output, which went quickly to video, included "Santa With Muscles” (with Dan Porush listed as executive producer) and "Secret Agent Club,” both starring Hulk Hogan. In addition to producing, Belfort tried his hand at writing and editing scripts.

Cockroaching
On April 19, 1995, Belfort was back in New York for a meeting at Millie's Place restaurant in Great Neck to discuss a growing crisis at Stratton.

In the summer of 1994, Loewenson, the SEC consultant, had issued his recommendations, which included tape-recording all of Stratton's conversations with customers and eliminating the bonuses it paid brokers for selling certain stocks. But Stratton astonished regulators by refusing to comply. Its lawyer, Ira L. Sorkin, said the recommendations were "impractical and irresponsible” and may have violated the SEC's original order.

Stratton's defiance forced the SEC into the lengthy process of obtaining a court order to make Stratton adopt the new procedures. In January 1995 a federal judge issued a preliminary injunction requiring the brokerage to comply with the SEC's order. In March, the judge issued a permanent injunction against Stratton, triggering automatic delicensing proceedings in a number of states.

Partly because of publicity surrounding the battle with regulators, Stratton's liabilities were soaring as a result of numerous investor complaints. By the end of 1995, the amount of money being demanded in arbitration against the firm had risen to $30 million, nearly triple the amount two years earlier.

By the time Belfort, Porush and a few advisers sat down at Millie's Place, "the handwriting was on the wall,” Belfort said. "The days of Stratton were definitely numbered. So Porush and I agreed to close Stratton's doors and... cockroach.”

Cockroaching meant setting up satellite firms, moving as many Stratton brokers there as possible, and continuing to cheat investors. "If someone turns on the light in a dark room, they scatter,” Porush said. "You live on vicariously.”

Shortly after the meeting, however, Porush changed his mind and embarked on an 18-month battle to keep Stratton open. "I had a lot of friends that worked there and a lot of money tied up in the place,” he said. "I was fighting to the bitter end to survive.”

Porush said he spent much of his time trying to make arrangements and deals with various state regulators. But he still managed to manipulate eight more stock offerings. And the National Association of Securities Dealers, a broker trade group and self-policing organization, said in a later complaint against Stratton that even though its sales calls were being recorded, supervisors allowed or even encouraged brokers to engage in fraud. Some brokers were recorded touting questionable stocks without discussing the risks, refusing to honor customer sell orders and making illegal price predictions.

"I'm telling you right now the stock will be around $18 to $25 per share,” one broker said on a tape reviewed by the NASD. "I think it's the best growth company right now, period, end of story, on the Nasdaq.”

While Porush was struggling to keep Stratton open, Belfort was betraying him by "shorting” Stratton offerings because he thought -- wrongly, he said -- that Porush had gone behind his back in some business dealings. Belfort said he made hundreds of thousands of dollars through the shorting, which involves selling borrowed stock in hopes of a price drop.

In December 1996 the NASD finally expelled Stratton from the industry, effectively closing its doors. The specific cause cited was overcharging customers in a 1993 offering. That complaint had been filed in late 1995 and early 1996, one of 12 the NASD brought against Stratton during its existence.

Asked why it took so long to close Stratton, Barry Goldsmith, executive vice president of the NASD's enforcement arm, said it was time-consuming to develop the kind of serious and complex case that would result in a Stratton ban. Also, he said, Stratton was expert at delaying regulators with litigation and offers of settlement.

"Today, all the regulators are far less tolerant of the kind of action Stratton was engaged in,” Goldsmith said. "We all learned a little bit from them.”

By the time Stratton was closed, seven states, including New Jersey, had revoked its brokerage license and numerous others were close to settlements severely restricting its operations. But New York State, which could have put Stratton out of business by delicensing it, didn't do so. Unlike many other jurisdictions, New York law requires regulators to file a civil suit to lift a license, rather than providing an administrative procedure. ‘I Almost Killed My Daughter'

After Stratton closed, Porush opened a small office in Great Neck and looked for a "business opportunity” for most of 1997. "I didn't know what to do with myself,” he said.

He hung out some with Belfort but they weren't close, partly because Belfort, as a recovering addict, wasn't supposed to spend time with people with whom he used to do drugs. By the end of the year, Porush had separated from his wife and moved to Florida, where he got a job selling sports collectibles.

Drugs had always been around at Stratton, during and after working hours, and Porush said that by the end of 1995 he was using quaaludes three or four times a day. "I'm sure it didn't enhance my ability to run a business,” he said. "Maybe it enhanced my ability to cope with the guilt and other nonsense.” He said he also used cocaine and ecstasy.

Belfort said he used quaaludes and cocaine and sometimes gave them to friends who worked for him, although he denied using them as a broker incentive. He testified that in 1996, he injured a woman in a traffic accident while driving under the influence of quaaludes.

But in early 1997, Belfort reached bottom. On the morning of April 17, when he had been taking quaaludes, cocaine and the tranquilizer Xanax for three days straight, he decided to take his 4-year-old daughter to Florida. He pushed his wife, who tried to stop him, down a small flight of steps, bruising her ribs. Then he put his daughter in the passenger seat, stepped on the accelerator and drove into the garage door, which had begun descending.

"That, for some reason, woke me up,” Belfort said. "I was almost like in a blackout, a trance. And I stopped and I got out of the car, and I just stood there and waited... Eventually, the police came.”

The incident ended with Belfort agreeing to seek help. His drug addiction, he testified, "was destroying my life, destroying my family's life. I almost killed my daughter, putting her in a car without a seat belt, high on drugs. I was going to either die or go to a drug rehab.”

A short time later, Belfort spent a month at a drug rehabilitation center. He said he hasn't used drugs or alcohol since. The Belforts later divorced.

In December 1997 Belfort started a Jericho-based company that distributed vitamins and other nutritional supplements. The firm had problems selling its products and "got kind of taken to the cleaners on inventory,” he said in taped conversations that were introduced as evidence at the Gaito trial.

But at least customers were happy. Belfort's new business "stood by its money-back product guarantees and made prompt refunds,” his lawyer said.
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