But the way we were using nominees—to secretly buy large blocks of Stratton new issues—violated so many securities laws that the SEC was trying to invent new ones to stop us. The problem was that the laws currently on the books had more holes than Swiss cheese. Of course, we weren’t the only ones on Wall Street taking advantage of this; in fact, everyone was. It was just that we were doing it with a bit more panache—and brazenness.
I said to Danny, “I understand he’s your rathole, but controlling people with money isn’t as easy as it seems. Trust me on that. I’ve been doing it longer than you. It’s more about managing your rathole’s future expectations and less about what you’ve made him in the past. Yesterday’s profits are yesterday’s news, and, if anything, they work against you. People don’t like feeling indebted to someone, especially a close friend. So after a while your ratholes start resenting you. I’ve already lost a few friends that way. You will too; just give it some time. Anyway, the point I’m trying to make is that friendships bought with money don’t last very long, and the same goes with loyalty. That’s why old friends like Wigwam are priceless around here. You can’t buy loyalty like that; you know what I’m saying?”
Danny nodded. “Yeah, and that’s what I have with Steve.”
I nodded sadly. “Don’t get me wrong, I’m not trying to belittle your relationship with Steve. But we’re talking about eight million bucks here, on the low side. Depending on what happens with the company, it could be ten times that.” I shrugged. “Who really knows what’s gonna happen? I don’t have a crystal ball in my pocket—although I do have six Ludes there, and I’ll gladly split them with you after the market closes!” I raised my eyebrows three times in rapid succession.
Danny smiled and gave me the thumbs-up sign. “I’m in like Flynn!”
I nodded. “Anyway—in all seriousness—I willtell you that I got a really good feeling about this one. I think this company’s got a shot of hitting it out of the park. And if it does, we have two million shares. So do the math, paclass="underline" At a hundred bucks a share that’s two hundred million bucks. And that kind of money makes people do strange things. Not just Steve Madden.”
Danny nodded and said, “I understand what you’re saying, and there’s no doubt that you’re the master at this stuff. But I’m telling you, Steve is loyal. The only problem is how to get that kind of money from him. He’s a slow payer as it is.”
It was a valid point. One of the problems with ratholes was figuring out how to generate cash without raising any red flags. It was easier said than done, especially when the numbers went into the millions. “There are ways,” I said confidently. “We could work some of it out with some sort of consulting contract, but if the numbers go into the tens of millions we’ll have to consider doing something with our Swiss accounts, although I’d like to keep that under wraps as much as possible. Anyway, the way things are going we have bigger issues than just Steve Madden Shoes—like the fifteen other companies in the pipeline just like Madden. And if I’m having trouble trusting Steve, well, most of the people I hardly even know.”
Danny said, “Just tell me what you want me to do with Steve and I’ll get it done. But I’m still telling you that you don’t need to worry about him. He sings your praises more than anyone.”
I was well aware of how Steve sang my praises, perhaps too aware. The simple fact was that I had made an investment in his company and taken eighty-five percent in return, so what did he really owe me? In fact, unless he was the reincarnation of Mahatma Gandhi, he had to resent me—at least somewhat—for grabbing such a large percentage of his namesake.
And there were other things about Steve that bothered me, things that I couldn’t share with Danny—namely, that Steve had made subtle intimations to me that he would prefer to deal directly with me than through Danny. And while I had no doubt that Steve was simply trying to earn brownie points with me, his strategy couldn’t have been more off the mark. What it proved was that Steve was cunning and manipulative—and, most importantly, in search of the Bigger Better Deal. If somewhere down the line he found a Bigger Better Deal than me, all bets would be off.
Right now Steve needed me. But it had little to do with Stratton raising him $7 million and even less to do with the approximately $3 million Danny had made him as his rathole. That was yesterday’s news. Going forward, my hold on Steve was based on my ability to control the price of his stock after it went public. As Steve Madden’s dominant market maker, virtually all the buying and selling would occur within the four walls of Stratton’s boardroom—which would afford me the opportunity to move the stock up and down as I saw fit. So if Steve didn’t play ball, I could literally crush the price of his stock until it was trading in pennies.
It was this very ax, in fact, that hung over the heads of all Stratton Oakmont’s investment-banking clients. And I used it to ensure that they stayed loyal to the Stratton cause, which was: to issue me new shares, below the prevailing market price, which I could then sell at an enormous profit, using the power of the boardroom.
Of course, I wasn’t the one who’d thought up this clever game of financial extortion. In fact, this very process was occurring at the most prestigious firms on Wall Street—firms like Merrill Lynch and Morgan Stanley and Dean Witter and Salomon Brothers and dozens of others—none of whom had the slightest compunction about beating a billion-dollar company over the head if they chose not to play ball with them.
It was ironic, I thought, how America’s finest and supposedly most legitimate financial institutions had rigged the treasury market (Salomon Brothers); bankrupted Orange County, California (Merrill Lynch); and ripped off grandmas and grandpas to the tune of $300 million (Prudential-Bache). Yet they were all still in business—still thriving, in fact, under the protection of a WASPy umbrella.
But at Stratton Oakmont, where our business was microcap investment banking—or, as the press liked to refer to it, penny stocks—we had no such protection. In reality, though, all the new issues were priced between four and ten dollars and weren’t actually penny stocks. It was a distinction that was entirely lost on the regulators, much to their own chagrin. It was for this reason that the bozos at the SEC—especially the two who were now camped out in my conference room—were unable to make heads or tails out of a $22 million lawsuit they’d filed against me. In essence, the SEC had engineered their lawsuit as if Stratton were a penny-stock firm, but the simple fact was that Stratton Oakmont bore no resemblance to such.
Penny-stock firms were notoriously decentralized, having dozens of small offices spread throughout the country. Yet, Stratton had only one office, which made it easier to control the negativity that would spread throughout a sales force after the SEC filed a lawsuit. Usually that alone was enough to force a penny-stock firm out of business. And penny-stock firms would target unsophisticated investors, who had little or no net worth, and convince them to speculate with a couple of thousand dollars, at most. Stratton, on the other hand, targeted the wealthiest investors in America, convincing them to speculate with millions. In consequence, the SEC couldn’t make their usual claim that Stratton’s clients weren’t suitable to risk their money in speculative stocks.
But none of this had occurred to the SEC before they filed their lawsuit. Instead, they mistakenly assumed that the bad press would be enough to drive Stratton out of business. But with only one office to manage, it had been easy to keep the troops motivated, and not a soul left. And it was only after the SEC had already filed their lawsuit that they finally got around to reviewing Stratton’s new-account forms and it dawned on them that all Stratton’s clients were millionaires.