SEC cracks down on “pink sheets” used by Wolf of Wall Street

The SEC cracks the market that gave rise to Jordan Belfort and The Wolf of Wall Street. Too bad it’s only a few decades too late.

Thousands of companies could disappear next week from the Pink Market, an over-the-counter stock exchange historically associated with investor fraud. That’s because the SEC is forcing companies listed on the exchange to perform a very difficult task: basic accounting.

A chain as strong as its weakest pink

Named after the color of the paper it once published stock quotes on, the pink market is where investors trade stocks over the counter rather than on a major exchange like the NYSE. Most of these are so-called “penny stocks,” which sell for less than $5 a share. Some really only cost a cent.

While certain retail investors love the rollercoaster experience, pink sheet trading is considered highly speculative (because many of the companies are in dire financial condition) and dangerous (because, as the SEC has warned, the off-exchange market is rife with fraud and manipulation).

The biggest problem is the market’s anemic disclosure standards, which the regulator is now trying to solve:

• Companies in the pink market are not currently required to publish accurate, current financial information. Hard to imagine in a world where the finances of countless companies are available with just a few taps.
• But the SEC will close that loophole next week. OTC Markets Group, which operates the Pink Market, says that about 2,000 of its 11,000 businesses could be removed as a result.

How Penny Fraud Works: Take Jordan Belfort, the infamous wolf of wall street. The financial advisor ran a “pump-and-dump” scheme by selling penny stocks to his clients and charging them fees for doing so, but didn’t bother to tell them that prices were rising because he bought the stock and created a false question. After dumping large sums of stock and causing the stock to crash, Belfort ultimately left 1,500 customers with $200 million in losses.

Crime pays: Belfort, who had to pay restitution to his victims, was also “punished” with a $500,000 book deal from Random House and a Martin Scorsese film adaptation of his memoir starring Leonardo Dicaprio.