I’ve watched four times and I still don’t get it!! Here’s the best I could come up with about how JT Marlin makes its money, using examples mentioned in the film: (1) Before companies like Farrowtech go public, they need to raise capital for the maintenance of their operations. So they approach an investment bank such as JT Marlin.
(2) JT Marlin helps the company out through bridge financing, which means they give the company the capital they want, as a loan.
(3) In return, JT Marlin receives discounted shares in the company. JT Marlin also has to find outside investors who will buy these shares, and thus use the sales revenue to pay themselves back.
(4) The investors JT Marlin attracts aren’t outsiders, but friends of the managing director, Michael. Farrowtech’s shares essentially belong to Michael alone, and he’s free to sell them to who he likes.
(5) Since the “investors” are fake, JT Marlin hasn’t actually raised any cash, so their newly acquired shares are worthless. Now, JT Marlin hires brokers to cold call people, exaggerate the value of their products (lying, basically). and encourage them to buy the Farrowtech stock.
(6) As the shares belong to Michael, he can fix the commission each broker receives for each share they sell. Fixing it at $2 or $3 entices the brokers to sell as much as possible, and brings out their sense of greed, but I think this is illegal, according to SEC and FINRA rules.
(7) The brokers’ hard work at selling Farrowtech stock creates artificial demand, which initially drives the share price up. Eventually it gets high enough so that JT Marlin can sell the shares on the stock exchange at a profit. This is a pump and dump. So far, so good. Here’s where I’m stuck. At around the 76 minute mark of the film, Seth Davis states that (1), (2), and (3) are fine “as long as there’s no connection between the investors and the firm.” What firm? The investment bank, or the company trying to go public? We know that JT Marlin’s investors aren’t outsiders but Michael’s friends. This suggests collusion and an unfair advantage, which is illegal, right? But what if it’s the other one, and the investors know the company trying to go public? So what? Additionally, numbers (1) through to (7) make sense for real companies e.g. Farrowtech was real in Boiler Room, and it offered JT Marlin microcap stock, by the looks of things. What about when JT Marlin bridge finances companies that don’t exist, like Med Patent? In the Med Patent case, whose shares did Seth sell to Harry Renard? My theory is that the Med Patent case is outright fraud. The brokers cold call people believing they’re selling stock (a la Michael’s speech halfway through the film). But all that actually happens once the brokers successfully “sell” Med Patent stock to a person, is that they’re passed on to the secretary, who takes down their bank details, and the monetary equivalent of the “purchased” shares is deducted from their bank account. This process is repeated across the trading floor every day until Michael is happy to move on. I’m unsure if the last two paragraphs are accurate. Can someone please give me a hand on nailing this once and for all?