Real Wolf of Wall Street Jordan Belfort says GameStop's stock surge 'is a modified pump and dump' and it's the amateur investors who come late to the party who will lose out the most

The real Wolf of Wall Street has described GameStop's stock surge as a 'modified pump and dump', arguing it's the amateur investors who come late to the party who will eventually lose out the most. 

Jordan Belfort told CNN: 'It's truly a modified pump and dump because, at the end of the day, it will most certainly go back down because it's not trading on any rational, fundamental value.' 

GameStop stock has rocketed from below $20 earlier this month to close around $350 Wednesday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall.

The action was even wilder Thursday: The stock swung between $112 and $483 before closing down 43.2% at $197.44. 

Asked about who might end up losing from the scheme, Belfort said: 'Right now it's not widows and orphans that are getting . 

'But who do you think are the last people that jump on the bandwagon are going to be? It's going to be the widows and the orphans, or the unprofessionals that keep hearing about it and hearing about it. 

'They are going to be the ones that end up getting in at the end of the party...there are going to be some massive victims in this, most certainly.'  

Jordan Belfort has described GameStop's stock surge as a 'modified pump and dump', arguing it's the amateur investors who come late to the party who will eventually lose out the most

WHAT IS A PUMP AND DUMP SCHEME?

The U.S. Securities and Exchange Commission describes 'pump and dump' schemes as where 'fraudsters typically spread false or misleading information to create a buying frenzy that will “pump” up the price of a stock and then “dump” shares of the stock by selling their own shares at the inflated price. 

'Once the fraudsters dump their shares and stop hyping the stock, the stock price typically falls and investors lose money.'

Source: investor.gov

Belfort spent 22 months in prison after pleading guilty to fraud and money laundering in 1999, and has since rebuilt his life as a motivational speaker.

His crimes were detailed in his first memoir, The Wolf of Wall Street, which was later turned into the 2013 blockbuster of the same name, starring Leonardo DiCaprio. 

The film — directed by Martin Scorsese - chronicles the boyish, fast-talking Belfort's antics as chairman of Stratton Oakmont Inc., the firm he started with a few desks and phones set up in a former Long Island auto shop. 

Stratton Oakmont was what is now called a 'boiler room' that marketed penny stocks - those of minimal value - and defrauded investors with the 'pump and dump' type of stock sales, taking large commissions on the trades, often at the expense of their investors. 

Stratton Oakmont made a fortune by using deceptive, high-pressure tactics to peddle penny stocks at inflated prices. After artificially pumping the value up, Belfort and others would dump their own shares before prices crashed.  

He added: 'Just remember, every time the market goes up, GameStop goes up, it's going to be harder and harder to make that next move up because the market cap is just not sustainable. 

'So, at a certain point, someone has to be crossing out the people who are selling and moving on to the next one. 

'There is some sort of loose crime going on, but it's going to be a very tough one to prove, I think.' 

Members of Reddit's WallStreetBets have spearheaded a campaign to drive up GameStop shares in a battle against hedge fund short-sellers.

The three million strong group of amateur investors on the forum exchange tips and boast about beating 'the system'. Some analysts have described the situation as a 'nerds vs Wall Street' battle. 

But Belfort said Wednesday: 'If you could prove that they are actually colluding together, then that would be illegal.

'The problem is it is sort of this loose collision where one person says "Let's stick together and stay strong." And theoretically, that's illegal. 

'But I doubt that the SEC U.S. Securities and Exchange would try to make a case out of something like that.

'I think what you have to realize is that for the average person there is money to be made in this and money to be lost. You need to be really careful.' 

GameStop stock has rocketed from below $20 earlier this month to close around $350 Wednesday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall. The action was even wilder Thursday: The stock swung between $112 and $483 before closing down 43.2% at $197.44

How does 'shorting' a stock actually work? 

Stocks typically benefit investors if the price goes up - they buy stock, the price increases if the company does well, then they sell it for a profit.

But there is a way to reverse that process. Known as 'shorting', it involves placing a bet against a company that means a trader makes money when the value goes down.

To do this, a trader borrows stock off a broker, usually for a fee, which they immediately sell - but with a clause saying that they have to buy back that stock by a certain date and return it to the broker.

If the value of the stock goes down, then the trader buys it back for less than the sale price, returning the stock to the broker along with the fee and keeping the rest of the money for themselves.

But, if the stock price rises, they will be forced to buy for more than the sale price, making a loss in the process.

While this sometimes happens by accident, other traders can deliberately boost the price in a process known as a 'short squeeze' - which is what Reddit did.

This benefits the 'squeezers' because they know that at some point, the short-sellers will be legally obliged to buy back their borrowed stocks, driving the price up further.  

It also inflicts heavy losses on the short-sellers, since the amount they lose is tied to the amount the stock rises - they are effectively 'punished' for betting against the company, which is what some Redditors appear to be interested in. 

Investors have been on a GameStop buying spree, which not only pushes up the shares but puts pressure on short sellers to make purchases to 'cover' their bets to avoid steeper losses.

This is known on Wall Street as a 'short squeeze' and can result in a dizzying rally by forcing short sellers into becoming buyers. 

As a result, GameStop surged 18 percent on Monday, another 115 percent Tuesday and had leapt 135 percent Wednesday. That followed a stunning 50 percent jump on Friday.

The extreme volatility has raised concerns about manipulation, which could lead to an investigation by stock market regulators, and has even drawn attention from the White House. 

Late Wednesday, the Securities and Exchange Commission said it was monitoring the activity.  

GameStop shares plunged on Thursday after trading app Robinhood restricted purchases. 

By noon, a federal class action lawsuit had been filed against the trading app in the Southern District of New York.

Robinhood also halted buying for shares of theater chain AMC, BlackBerry, retailers Express and Bed Bath & Beyond, headphone maker Koss, swimwear line Naked Brand Group, and Nokia. All were down by double digits in midday trading.  

GOP Senator Ted Cruz and Democrat Squad member Alexandra Ocasio-Cortez have both called for investigations and criticized Robinhood for shutting down trades while hedge funds are still free to buy and sell stocks as they please.    

The war began last week when famed hedge fund short seller Andrew Left of Citron Capital bet against GameStop and was met with a barrage of retail traders betting the other way. He said on Wednesday he had abandoned the bet.  

The Redditers have taken advantage of a process called 'short selling', which effectively reverses the way the stock market traditionally works.

Instead of buying a stock in the hope company does well and the price goes up, then selling for a profit, shorting involves betting against a stock in the hope the value goes down, and then pocketing a share of the difference.

The catch is that, if the investors are wrong and the price actually goes up, they will end up losing potentially huge sums of money, depending on how far the price rises.       

Belfort pleaded guilty in 1999 and agreed to become a government witness in a case against an accountant and other stock fraud defendants accused of cooking the firm's books and funneling money into a bogus holding company and overseas bank accounts.

Belfort spent 22 months in prison after pleading guilty to fraud and money laundering in 1999, and has since rebuilt his life as a motivational speaker. His crimes were detailed in his first memoir, The Wolf of Wall Street, which was later turned into the 2013 blockbuster of the same name, starring Leonardo DiCaprio, pictured

In 2003, after a broken marriage and a bout with drug addiction, Belfort was sentenced to 3½ years in prison and ordered to chip away at the $110 million restitution by giving 50 percent of his future earnings to the government. 

Stratton Oakmont at one point employed over 1,000 stock brokers and was involved in stock issues totaling more than $1 billion, including being behind the initial public offering for footwear company Steve Madden Ltd. 

Belfort served 22 months at the Taft Correctional Center in Taft, California, in exchange for a plea deal with the Federal Bureau of Investigation for the pump-and-dump scams he ran that led investors to lose approximately $200 million and he was ordered to pay back $110.4 million that he swindled from stock buyers.

Belfort shared a cell with Tommy Chong while serving his sentence, and Chong encouraged Belfort to write about his experiences as a stockbroker. He now makes his money as a writer and motivational speaker.

THE MARKET SWINDLER WHOSE LAVISH LIFESTYLE AND DODGY DEALS TOOK HIM FROM COUNTRY ESTATES TO JAIL 

Belfort, from The Bronx, New York, started out as a trader at LF Rothschild but claims he was laid off after the market crash of 1987. He then claims to have founded Stratton Oakmont with friends, although other sources say he and his partners bought out the original founder.

Belfort, from The Bronx, New York, started out as a trader at LF Rothschild but claims he was laid off after the market crash of 1987. He then claims to have founded Stratton Oakmont with friends, although other sources say he and his partners bought out the original founder.

Stratton Oakmont was what is now called a 'boiler room' that marketed penny stocks - those of minimal value - and defrauded investors with the 'pump and dump' type of stock sales, taking large commissions on the trades, often at the expense of their investors. During his years at Stratton, Belfort developed a lifestyle of lavish parties and heavy use of recreational drugs, especially methaqualone — known by its brand name Quaalude — which he became addicted to.

Stratton Oakmont was what is now called a 'boiler room' that marketed penny stocks - those of minimal value - and defrauded investors with the 'pump and dump' type of stock sales, taking large commissions on the trades, often at the expense of their investors. During his years at Stratton, Belfort developed a lifestyle of lavish parties and heavy use of recreational drugs, especially methaqualone — known by its brand name Quaalude — which he became addicted to.

Jordan Belfort served 22 months in jail

Stratton Oakmont at one point employed over 1,000 stock brokers and was involved in stock issues totaling more than $1 billion, including being behind the initial public offering for footwear company Steve Madden Ltd. The notoriety of the firm, targeted by law enforcement officials through virtually its entire history, inspired the films Boiler Room (2000), about unscrupulous market traders, and 2013 biopic The Wolf of Wall Street.

Stratton Oakmont at one point employed over 1,000 stock brokers and was involved in stock issues totaling more than $1 billion, including being behind the initial public offering for footwear company Steve Madden Ltd. The notoriety of the firm, targeted by law enforcement officials through virtually its entire history, inspired the films Boiler Room (2000), about unscrupulous market traders, and 2013 biopic The Wolf of Wall Street.

The National Association of Securities Dealers (now the Financial Industry Regulatory Authority) started pursuing Stratton Oakmont in 1987 and eight years later, they eventually secured its permanent shutdown in 1995. Belfort was then indicted for securities fraud and money laundering.

The National Association of Securities Dealers (now the Financial Industry Regulatory Authority) started pursuing Stratton Oakmont in 1987 and eight years later, they eventually secured its permanent shutdown in 1995. Belfort was then indicted for securities fraud and money laundering.

Belfort served 22 months at the Taft Correctional Center in Taft, California, in exchange for a plea deal with the Federal Bureau of Investigation for the pump-and-dump scams he ran that led investors to lose approximately $200 million and he was ordered to pay back $110.4 million that he swindled from stock buyers.

Belfort served 22 months at the Taft Correctional Center in Taft, California, in exchange for a plea deal with the Federal Bureau of Investigation for the pump-and-dump scams he ran that led investors to lose approximately $200 million and he was ordered to pay back $110.4 million that he swindled from stock buyers.

Belfort shared a cell with Tommy Chong while serving his sentence, and Chong encouraged Belfort to write about his experiences as a stockbroker. He now makes his money as a writer and motivational speaker.

Belfort shared a cell with Tommy Chong while serving his sentence, and Chong encouraged Belfort to write about his experiences as a stockbroker. He now makes his money as a writer and motivational speaker.