With all of the money flowing through Wall Street, a few bad apples among company executives is inevitable. But there are bad apples, and then there are these five guys who are rotten to the core. Although their schemes have varied, they all found a way to game the system and live a lifestyle of luxury and excess before ultimately being brought to justice. The bad boys of Wall Street are legendary.
Meet the Bad Boys of Wall Street
While only in his 20s and still in grad school at the University of Pennsylvania’s Wharton School, a scrappy young man named Michael Milken came up with a crazy idea. He realized that investors could make more money buying bonds issued by companies with poor credit ratings (now known as junk bonds) as compared to investing in the bonds of AAA-rated companies. Milken also realized that these lucrative junk bonds were in short supply, so he decided to do something about it.
Once out of school and employed by Drexel Burnham Lambert, Milken set out to create a new supply of junk bonds by persuading companies that were flying under the radar to issue bonds. Drexel Burnham would then underwrite these bonds. To say it worked would be a gross understatement. Milken personally made $295 million in 1986 and $550 million in 1987.
Not surprisingly, it wasn’t long before the Securities and Exchange Commission decided to take a closer look at the “Junk Bond King.” In 1990, after a four-year investigation, Milken pleaded guilty to six criminal charges related to securities law and paid a $600 million fine, plus another $500 million to Drexel Burnham’s private investors who lost money when the firm went belly-up later the same year. He was also barred from the securities industry for life.
Michael Milken, the Junk Bond King, was sentenced to ten years; he ended up serving 22 months in a federal minimum-security prison.
Portrayed by Leonardo DiCaprio in the 2013 hit movie “The Wolf of Wall Street,” Jordan Belfort spent the 1990’s making untold millions through his investment company, Stratton Oakmont. His rise and fall pretty much guaranteed his life story would be a blockbuster and that he will be forever remembered as one of the top bad boys of Wall Street.
The native of Queens, New York, began hustling practically as soon as he learned to talk. When he started selling stocks in 1987 at age twenty-five, Belfort’s natural sales ability made him a rising star. Just two years later, he started his own investment company, Stratton Oakmont, where drugs, sex, and a fast lifestyle defined the company culture and making money whether the methods were legal or not was a way of life.
Along with his partner Danny Porush, Stratton Oakmont made millions by illegally defrauding its investors using what became known as a “pump and dump” scheme. Stratton Oakmont would purchase shares of a company with little to no value and then systematically have their brokers push the worthless stock to unassuming clients.
Fueled by a desire to get rich quick coupled with the hard-edge sales tactics used by Stratton Oakmont brokers, clients began purchasing stock. As more innocent people invested, they unknowingly inflated the stock price. Then Stratton Oakmont would abruptly sell off their own personal position in the company at a massive profit, crashing the price back to reality and leaving investors holding the bag.
Belfort caught the attention of the Securities Exchange Commission in 1992, culminating in a 1999 guilty plea for securities fraud and money laundering. Despite a four-year prison sentence handed down in 2003, Belfort only served 22 months.
When he was only fifteen years old, Barry Jay Minkow founded ZZZZ Best, a carpet-cleaning and restoration company. Facing cashflow and other logistical problems, Minkow began financing the business by a variety of illegal schemes including credit card fraud, faking break-ins at his office, check kiting (writing bad checks to take advantage of the float by accessing missing funds, and outright theft). He even stole his own grandmother’s jewelry! These tactics, along with numerous loans from loan sharks and other shady characters affiliated with organized crime kept ZZZZ Best afloat (and put him on our bad boys of Wall Street list).
Minkow then massively expanded throughout Southern California, with the carpet cleaning division earning a solid reputation for quality work. Aided by extraordinary scams designed to deceive auditors, Minkow became the youngest person to guide a company through an IPO, giving him access to $15 million in financing and making him an instant millionaire (at least on paper). The real gem of ZZZZ Best was a totally phony restoration division, which despite never actually existing, was the driving force of the company’s $280 million value by February 1987.
As Minkow desperately pursued more prominent deals to raise more capital, the entire Ponzi scheme was exposed by a former customer who just wanted ZZZZ Best to repay them a few hundred dollars in losses, a reasonable demand that Minkow repeatedly ignored. Years of fraudulent practices were quickly exposed by law enforcement and the media, leading to Minkow’s indictment in 1988 for a litany of charges including embezzlement, racketeering, securities fraud, bank fraud, mail fraud, money laundering, and tax evasion. In the end, it turned out that nearly 90 percent of the company’s revenue was the product of Minkow’s fraud. When the scheme collapsed in 1987, investors and lenders were out $100 million, giving Minkow the distinction of perpetrating the most significant accounting fraud in history.
After being released from jail, Minkow reformed himself as a pastor and fraud investigator in San Diego. His reformation lasted until 2011 when he was ordered back to prison for five years for manipulating stock prices. Just three years later he defrauded his own church, earning Minkow another five years in prison. He also must pay $612 million in restitution, which is hard to do from inside a prison cell.
Bernie Madoff is the man behind the most massive Ponzi scheme ever, defrauding tens of billions of dollars over the course of nearly two decades, which rightfully puts him on our bad boys of Wall Street roster. He was also a pioneer in electronic trading and chair of the Nasdaq in the early 1990s.
Despite pretending to generate substantial, steady returns through an investing strategy called split-strike conversion, Madoff’s actual methods were much more straightforward. Instead of investing his clients’ money, he deposited it into one bank account, used to pay clients who decided to cash out. His remarkable ability to fraudulently attract new investors and capital came to an abrupt halt during the financial crisis in 2008.
Knowing that the jig was up, Madoff came clean to his two sons who worked for the firm but allegedly did not know about their father’s misdeeds. They turned their father over to authorities the very next day, at which point the fund reportedly held $64.8 billion in client assets.
In 2009, Madoff pleaded guilty to 11 federal felony counts, including securities fraud, wire fraud, mail fraud, perjury and money laundering. The 71-year-old Madoff was sentenced to 150 years in prison, along with nearly $200 million in asset forfeitures. However, the real impact of Madoff’s fall was felt most severely by his former investors, thousands of whom lost their life savings.
Sri Lankan native Raj Rajaratnam made his money during the tech boom in the 1990’s before starting Galleon, his own hedge fund. By 2009, Forbes magazine ranked him as the 236th richest American, with an estimated net worth of $1.8 billion. Rajaratnam is widely believed to be the world’s richest Sri Lankan.
In 2004, the Internal Revenue Service discovered that Rajaratnam and another Galleon executive created a sham tax shelter to hide $52 million of income, which put him in the crosshairs of the federal government. Then, in 2005, the Securities Exchange Commission found that Galleon had repeatedly violated stock-trading rules, making him one of the bad boys of Wall Street.
To seal the deal, a former employee allowed the FBI to tap her cellphone, giving the government access to conversations between her and Rajaratnam. The taped interviews were vital to a massive case the F.B.I. was building against Rajaratnam, with the former employee as the star witness.
On October 16, 2009, police arrested Rajaratnam on charges of insider trading with the scheme’s alleged profits reaching $25 million. Rajaratnam pleaded not guilty, but the damage was done. Investors immediately pulled their money from Galleon, forcing the troubled hedge fund to close within a month.
Ultimately, twenty-one former Galleon employees were arrested, and 11 pleaded guilty, making this case the largest ever made against a hedge fund.
The most chilling aspect of these bad boys of Wall Street is that for the longest time, nobody realized they were engaging in criminal activity to defraud investors. Victims lost untold fortunes by trusting all of their money to these men and many others like them. The best way to keep you (and your money) safe from scams is to diversify your portfolio through Stockpile. By controlling your investments, you also control your destiny.