Regulatory changes
Penny saved is a penny stock wasted
On July 18 of 1990, Something so fishy caused the House of Representatives to chuck a penny stock reform act to the Senate. Maybe through indirect measures, it was the penny stock of a Pro Bass Shops replica. However, look no further, the act states it is, " An Act To amend the Federal securities laws in order to provide additional enforcement remedies for violations of those laws and to eliminate abuses in transactions in ' penny stocks, and for other purposes" (Congress 1). This is addressing recent securities fraud circa 1990. Jordan Belfort’s brokerage prospered for years after the passing of the Penny Stock Reform Act. This implies the Securities and Exchange Commission(SEC) could smell the Wolf's BBQ ribs marinating in the refrigerator, or his contemporaries beat him to catch the SEC’s attention. Prematurely by reading this first page, I have concluded that he did not solely change regulations. Many others would argue that he did not change the regulations behind penny stock trading, but they relate to Jordan Belfort’s case. With no rebuttal in the chamber after reading the Penny Stock Act, I am left with the task of relating regulations to his case.
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There are many technical terms. I have provided a glossary and thorough explanations.
Regulations VS Jordan Belfort
To begin, definitions and regulations must be explicit, so I can correlate them to the ethics of Jordan Belfort’s actions. Therefore, we must refer to Title V of the Penny Stock Reform Act because it specifically addresses findings and rules for trading penny stocks. One interesting finding is, " Unscrupulous market practices and market participants have pervaded the "penny stock" market with an overwhelming amount of fraud and abuse" (Congress 21). This is obvious from a contemporary perspective, in a state of the world ω where everyone has access to reliable quick information. Take off your Yeezy's. Now put yourself in the shoes of a person in a less empowered world, being the 90s.
Now imagine yourself as a customer or regulator in the 90's
Why would I make such a request? Well, OTC companies have the privilege of omitting transparency to investors, even after the Penny Stock Reform Act. Currently, the SEC requires public companies to publish financial statements. The act places responsibility on the broker to guide the investor with ethical transactions; in contrast, the investor is misled into buying something with a lack of information during the 90s’ state of the world ω. This is expected. Jordan Belfort can probably sell a car to an unlicensed driver. Jordan Belfort drove his firm over spikes placed by the SEC with no trouble. He successfully sold penny stocks despite the Penny Stock Reform Act defining, “The term 'penny stock' means any equity security other than a security that is— (i) registered or approved for registration and traded on a national securities exchange…authorized for quotation on an automated quotation system sponsored by a registered securities association…issued by an investment company registered under the Investment Company Act of 1940” (Congress 22). In digestible terms, a penny stock is a highly illiquid equity security traded over the counter (OTC) without an initial public offering. Adding to Congress’s preposition, information about penny stocks could have been omitted before Jordan Belfort’s investors purchased such an instrument, which is unethical, and violates regulations. These conditions are a recipe for a disastrous storm. Set aside any concerns, the act has imposed regulations to set prosperous conditions for investors interested in expensive Oracolo Gold Cap Balsamic Vinegar drizzled over their 5-star meals, hopefully.
Nothing could stop Jordan Belfort
Why do the rules imposed and enforced seem promising? The regulations set in place are non-negotiable to brokers or else they get their brokerage license revoked. It is an ultimatum. According to the Penny Stock Reform Act, “—Prior to effecting any transaction in any penny stock, a broker or dealer shall give the customer a risk disclosure document that [contains the following]” (Congress). Congress argues penny stocks must be traded in a fashion counterproductive to the goals of a broker. Although I agree penny stock transactions should be transparent, there must be a high level of trust in the brokers to believe they will follow sales-shrinking regulations. Why? the document provides decisive risk disclosure, such as a warning of how volatile penny stocks are compared to large-cap stocks. Where the betas are high. Another piece of information that it would contain is transaction costs relating to bid/ask spreads. Additionally, the document must contain important definitions of words associated with trading penny stocks. I mentioned Congress was a little naïve to predict brokers like Jordan Belfort would go against their sales targets in the name of ethics, but they make up for this by setting up punishments.
In general, a broker perpetuating the mystery of penny stocks for their customers is unethical. The laws did not always shun unethical behavior. Therefore, congress grants, “[the] authority of a court to impose money penalties and to prohibit persons from serving as officers and directors” (Congress). Congress sets the basis for courts to impose the anvil of the law, hopefully, while concurrently subjecting perpetrators to the rule of law. To compliment Congress’s authoritative measure on obscure financial markets, I can assert monetary penalties can remove incentives to commit financial crimes. In the case of Jordan Belfort, he owes 110 million in restitution. While Some could say that is insane for a white-collar crime; others will beg to differ like Emily Esfahan Smith, whom I mention in my restitutions part. I can coin both, by claiming in absolute terms it is a severe punishment, but in relative terms to net cash flows to the owner, it may be a questionable magnitude of penalties. I will just NFL combine shuttle this topic for now. However, the idea has been drafted.
In conclusion to my findings on the regulatory subject matter, I can assume Jordan did not cause regulations on penny stocks to change. Regulations did not change his operations either. He still behaved unethically and unlawfully. They took advantage of a less empowered state of the world, by making investors even less informed. The SEC now can impose rules on brokers to inform their investors thoroughly. This seems promising, in practice brokers like Jordan Belfort did not want to renounce potential sales by providing disclaimers to their clients. This creates dire consequences for those brokers, who must give up their licenses and pay a penalty. While in the case of Jordan Belfort, it seems as if his fairness of punishment is arbitrary. I consider factors such as cash flows in comparison to penalties. Would a million-dollar DUI ticket feel fair after crashing into Elon Musk’s billion-dollar rocket?
