The Irony and Lessons of 'The Wolf of Wall Street'

Here are some simple but great lessons that investors can learn from Kodak and Steven Madden.

Jan 27, 2014 at 5:40PM

For those of you unfamiliar with the story behind the movie, The Wolf of Wall Street stars Leonardo DiCaprio playing the role of real-life criminal Jordan Belfort. In short, the movie portrays the adventures of Belfort as he used his brokerage firm to swindle investors through a combination of securities fraud, market manipulation, and money laundering involving penny stocks. Belfort served 22 months in prison and was ordered to pay $110 million in restitution to his victims. The irony here is that Belfort was sitting on top of a real gold mine that could have made him a billionaire legally, and he apparently didn't even know it.

The Kodak Pitch
Two key companies mentioned in the movie are Eastman Kodak (NYSE:KODK) and Steven Madden (NASDAQ:SHOO). The scheme often involved something that was nicknamed "The Kodak Pitch." A broker from Belfort's office would cold-call clients and pitch to them Eastman Kodak, a company then seen as a solid blue-chip company.

At the time, Eastman Kodak was in patent litigation with Polaroid, and the pitch was that the stock would go up in the long term once that litigation was settled. The point of the pitch was merely to gain the client's trust by recommending a familiar household name that larger brokerage houses such as Merrill Lynch might recommend. The goal here was to make the client think Belfort's firm was equally trustworthy to that of Merrill Lynch. From there, the client would get future updates on Eastman Kodak and then new stock pitches, which would involve a penny stock which Belfort was illegaly manipulating and funneling money through. The penny stocks often had little or no true fundamental value and later crashed, wiping out the client's investment while Belfort and his firm pocketed millions.

Steven Madden Shoes
The better the penny stock story, the more successful the firm was able to manipulate and sell shares to unsuspecting clients. Steven Madden himself was a childhood friend of one of the key partners of Belfort's firm. So what better story, they thought, than to take Steven Madden public as a penny stock. His shoe company was quickly becoming famous with accelerating demand. It was the perfect story for a pump and dump.

Belfort and his crew went to work. They organized an IPO that gave themselves up to 85% of the company then dumped shares right after the company went public to their clients, raking in $23 million and laughing all the way to the bank. There's just one little catch: 85% of Steven Madden today is worth around $1.9 billion, or well over 8,000% higher than where Belfort's firm sold their shares. The "victims," if they are still holding onto their shares, have made a fortune. A mere $10,000 invested then would be worth nearly $1 million today.

Meanwhile, Eastman Kodak, the original "blue chip" used as a safe and secure company to serve as bait, has since filed for bankruptcy and wiped out its common shareholders. In a twist of irony, the bait stock went bust and the "scam" stock could have turned relatively small retail investors then (1990s) into millionaires today.

Analysts expect Steven Madden to post $1.4 billion in sales for 2014 with earnings per share of $2.16. The company boasts a bigger market cap than even Skechers (NYSE:SKX). Analysts expect Skechers to post $2.08 billion in sales this year along with $1.74 per share in earnings. Steven Madden continues to be a solid company in its industry. If only Belfort had any clue what he and his clients owned in Steven Madden, he could have made all of them and himself a legitimate fortune that would be worth many, many multitudes higher than what his firm scammed for. s

Foolish final thoughts
The lesson here is the old Peter Lynch adage of "know what you own." Big and popular names don't necessarily mean safety, as Eastman Kodak ultimately proved. Sometimes, the biggest winners could be right underneath your nose as we've seen with Steven Madden. Another lesson here is not to judge a stock by the guy pitching it to you. Sometimes the less savvy or less honest manage to stumble onto something big. Do your own research. You'll never know if you've happened to stumble onto the next Steven Madden unless you do your own homework.

This could be the next Steve Madden...
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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