Stratton Oakmont

~ the eulogy ~

Jordan Belfort opened a franchise of a small broker-dealer called Stratton Securities, bought out the whole firm, and started Stratton Oakmont with Danny Porush in 1989. It grew into the largest over-the-counter house in the United States and took thirty five companies public, Steve Madden Ltd among them. It had no product control function, which is the desk inside a brokerage that independently checks the prices of the firm's own positions and watches its trading. Nobody there was checking.

The business was the pump and dump. Buy a microcap position cheaply, sell it hard over the phone on false and misleading statements until the price is where you want it, then unload your own inventory into the price you built. The refinement Stratton added was at the exit: when a stock started falling, the firm refused to accept or process customer sell orders, so the people on the other end of the phone watched the number drop with no way out of it.

The NASD had been on the firm from 1989 onward. In April 1996 the New York District Business Conduct Committee barred it from principal retail transactions for a year, the firm appealed, and on 5 December the National Business Conduct Committee expelled it from the association altogether, which ended the business. Belfort had already left in February 1994 and Porush was barred. In 1999 both were indicted for securities fraud and money laundering, pleaded guilty, cooperated with prosecutors against other houses, and admitted a scheme that had manipulated the stock of at least thirty four companies over seven years.

~ the dossier ~

~ the post ~

In October 1994 an unidentified person posted on Money Talk, a Prodigy bulletin board for talking about finance, that Stratton Oakmont and its president Danny Porush had committed criminal and fraudulent acts in connection with a stock offering. The firm sued Prodigy and the anonymous poster for libel in a New York court, asking $200 million. Prodigy's defense rested on Cubby, Inc. v. CompuServe from 1991, in which a federal court had found that an online service carrying third party writing was closer to a library than to a publisher and was therefore not liable for it.

The New York Supreme Court ruled against Prodigy in 1995 on the ground that Prodigy moderated. The court listed what that meant. Prodigy published content guidelines and paid Board Leaders to enforce them. It also ran screening software that stripped offensive language. The distinction the court drew from CompuServe was stated directly in the opinion: Prodigy's "conscious choice, to gain the benefits of editorial control, has opened it up to a greater liability than CompuServe and other computer networks that make no such choice."

~ what congress did about it ~

Read next to Cubby, the ruling produced a rule nobody wanted. An online service that moderated became responsible for every word its users wrote, and an online service that moderated nothing stayed protected. Every operator running a bulletin board in 1995 now had a legal reason to stop reading it.

Christopher Cox and Ron Wyden wrote the Internet Freedom and Family Empowerment Act to resolve the contradiction. The House passed it 420 to 4 on 4 August 1995. Six months later it was folded into the Communications Decency Act inside the Telecommunications Act of 1996, and the Senate passed the conference report 91 to 5 on 1 February 1996.

In 1997 the Supreme Court struck down most of the Communications Decency Act as an unconstitutional restriction on speech. Section 230 survived, because it had been written to enable speech rather than restrict it, and it overturned the Stratton ruling by stating that a provider is not to be treated as the publisher of what another party posts. That is twenty six words, and every comment section and social feed in the United States has been operating under them since. They were drafted to fix a problem created by a firm the regulators put out of business eighteen months later.

~ how the name travelled ~

The firm itself was local in every sense, a phone room on Long Island selling American microcaps to American retail investors, and it was gone before most of the world had a dial-up account. The name travelled in 2013 as a Martin Scorsese film, which is how nearly everyone outside American securities enforcement first heard it. What crossed borders with real consequences was the legal clause, and it crossed unevenly. Turkey took up the same question eleven years after the Prodigy ruling and answered it the other way: Law 5651, passed on 4 May 2007, made hosting providers responsible for removing content once notified and built a blocking mechanism for the cases where they did not. The American answer to a host that moderates is immunity. The Turkish answer is an obligation.

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