Why investing in the stock market has failed investors for the last 20 years

The Wolf of Wall Street, Jordan Belfort, pleaded guilty to fraud and related crimes in connection with stock market manipulation and running a boiler room as part of a penny-stock scam. He would call potential investor’s and sell them penny stock as IPO’s and over valued his investments. 

Accounting fraud, corporate fraud and corruption led to the Enron scandal. They used the prestigious accounting firm Arthur Anderson for their bookkeeping. The heads of Enron were able to convince the accountants to completely ignore acceptable accounting practices to help over value the company. They then pushed employees to put all of their 401k investments into the company stock with false high returns. They had fleeced their own employees. 

The Dot Com Bubble was caused by investors over looking traditional metrics for the new technology businesses such as price-earnings ratio. This led to heavy over evaluation of stocks. Coming off the long twenty year bull run of the 80’s and 90’s, it was generally believed that these businesses couldn’t fail. Many didn’t offer a service or product at all.

Best known and largest Ponzi scheme to date. Bernie Madoff was the former chairman of NASDAQ and the head of his own investment scandal. He carried this on for the better part of 40 years. He overpaid advisors their fees but didn’t allow them to let their clients know who they were investing with. To keep the Ponzi scheme going he needed to keep large amounts of money coming in. He targeted the elite from all over the world. Many advisors notified the SEC that his returns didn’t sound legitimate but the SEC refused to investigate. The SEC felt he was untouchable and completely credible. It took prompting the SEC five times before an actual investigation started. He had a second office on a different floor that generated stock trades to cover his tracks. After he was caught, the SEC couldn’t verify that he had ever made a single stock purchase for any client.

The Financial Crisis was caused by Large Investment Banks that used poorly designed MBS’s (Mortgage Backed Securities) and CDO’s (Collateralized Debt Obligations) to get over exposed on their investments. Regulators allowed different mortgage tranches to get incorrectly rated. This led to huge over speculation of the value of the mortgages. Couple that with overly lax mortgage loan practices and customers that either didn’t qualify for loans or were given too expensive loans. The housing market imploded and brought the economy to a stand still.

The SEC opened an insider trading investigation into the SAC Capital Advisors. The firm and multiple managers plead guilty to insider trading. The company was levied the largest fine in SEC history of $1.9 billion. Somehow Steven Cohen avoided a felony charge by stating he wasn’t aware of what insider trading meant. The company closed and reopened under the new name of Point 72 Asset Management with Steven A Cohen as the founder. He then purchased the New York Mets for $2.4 billion.

Wells Fargo headed down the same bad road as previous companies by offering sales incentives that led to deceptive business practices. After years of employees opening accounts and credit cards under their customers names without their knowledge, Wells Fargo agreed to pay the fee and resolve the criminal and civil investigation into their sales practice. There were millions of accounts without customer authorization.

Theranos was a healthcare company founded by a college dropout, Elizabeth Holmes. The company was developing a blood testing machine that would run a multitude of tests off one single drop of blood. Elizabeth Holmes and her partner Ramesh “Sunny” Balwani committed fraud by falsifying the results from the machine they had developed. They continued to do this even after they were well aware that their machine couldn’t do what they were claiming. They partnered with Walgreens to set up their machines in the stores never mentioning that they weren’t working. This led to many patients getting a misdiagnosis of their illnesses and treatments.

Hedge fund managers go after Gamestop by shorting the stock to force them out of business. A group on reddit begin to buy the stock, driving up the price while depleting the capital from the hedge funds. Several hedge funds went out of business when they received the margin call. Robinhood halted trading by freezing the purchase option to it’s customers. This happened after Robinhood received instructions from Citadel Securities, the market maker that handled Robinhood’s accounts. When this unprecedented action occurred, investors began to lose their money. This brought to light that Robinhood’s app, that allowed people to purchase the Gamestop stock through a process advertised as “commission free.” There is now congressional hearings regarding the process of Payment For Order Flow. This process takes the customers money, pays a commission to the market maker, Citadel Securities, with no transparency. It’s being debated if this practice is deceitful to investors. The first person to develop this concept decades before was Bernie Madoff.

The FTX Scandal broke with the SEC charging founder Sam Bankman-Fried with defrauding investors in crypto asset trading platform, FTX. He took clients money without their knowledge or consent and used it for unsecured loans, bad investments, and personal loans. Many of the transactions took place through an FTX affiliated trading firm, Alameda Research. This act of transferring clients money without their consent to Alameda is illegal. This led to a large portion of the clients money never being traced or returned. The founder and executive Sam Bankman-Fried was arrested.