The self proclaimed “Wolf of Wall Street,” Jordan Belfort, expects the Robinhood trading platform to go out of business over the GameStop (GME) trading controversy. “I really believe the lawsuits are going to be very problematic,” Belfort told Yahoo Finance Live.
Belfort was the founder of the defunct Stratton Oakmont brokerage. He plead guilty in 1999 to running an illegal “pump and dump” stock scheme that cost his clients more than $100 million. Belfort served 22 months in federal prison and later authored a memoir, “The Wolf of Wall Street,” which became a film starring Leonardo DiCaprio.
GameStop shares soared more than 1,600%, in three months, hitting $483 last week and that surprised Belfort. “When I first looked at it I said, ‘Yeah, it's a modified pump and dump,’” he said.
Individual stock pickers used Reddit’s WallStreetBets forum to martial an army of retail investors. They used platforms, like Robinhood, to trade up the price of GameStop stock squeezing short sellers like Melvin Capital, which lost billions of dollars.
“What the small investors were able to do here is shocking,” Belfort pointed out. “It deserves an applause.”
Belfort went on to defend the retail investors, “I don't think it's illegal, because most of them by the way, if you actually go through the message boards they just like, they love the stock. They’re just having fun and they want to kind of stick it to the man more than anything.”
Robinhood’s not so merry man
Robinhood restricted trading in GameStop and several other stocks last week. The platform’s CEO and co-founder Vlad Tenev defended the controversial move telling Yahoo Finance, “We stand with the people who are making their voices heard through the markets, and showing the world that investing is for everyone, not just for the wealthy and not just the institutions.”
Barstool Sports’ Dave Portnoy captured the furor of retail investors, blocked from trading their shares of GameStop on Robinhood, when he tweeted, “Either @RobinhoodApp allows free trading like they say they do or they die. It’s really that simple.”
— Dave Portnoy (@stoolpresidente) January 28, 2021
Belfort predicts Robinhood will die, “Because of this decision Robinhood made, it's gonna be very, very hard for them to stay in business, I believe.”
Multibillion dollar lifeline
Robinhood raised $2.4 billion in less than a week from investors like Ribbit Capital, ICONIQ Capital, Andreessen Horowitz, Sequoia Capital, Index Ventures and New Enterprise Associates to meet its clearinghouse deposit requirements. Tenev said the clearinghouse asked for $3 billion in collateral.
Belfort calls that a red flag. “What they did by completely eliminating buy and sell that was a bit of a red flag to me that there might be some other more nefarious things about like getting pressure from the people who are short,” Belfort said.
Right now it’s the dozens of potential lawsuits that threaten Robinhood’s future, according to Belfort. “I mean just imagine the amount, the number of lawsuits and what that will do to the ability of Robinhood to stay in business because of just the capital reserves,” he warned.
Belfort suggests forgetting about the public perception of Robinhood. “The balance sheet will be a disaster,” he said.
Adam Shapiro is co-anchor of Yahoo Finance Live 3pm to 5pm. Follow him on Twitter @Ajshaps