Bernie Madoff Research Articles

Finding Bernie Madoff: Detecting Fraud by Investment Managers

Finding Bernie Madoff: Detecting Fraud by Investment Managers

Finding Bernie Madoff: Detecting Fraud by Investment Managers

Using a panel of mandatory SEC disclosure filings we test the predictability of investment fraud. We find that past regulatory and legal violations, conflicts of interest, and monitoring, are significantly associated with future fraud. Avoiding the 5% of firms with the highest fraud risk allows investors to avoid 29% of investment frauds, and over 40% of the total dollar losses from fraud. Even though our predictions are based on publicly available information, we do not find evidence that investors are compensated for fraud risk through superior performance or lower fees. The results suggest that the currently required disclosures contain relevant information but this information is not fully utilized by investors. We suggest changes in SEC disclosure policy that increase investors' ability to detect fraud at minimal cost.

Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy

A very popular derivatives combination position is to own an underlying asset, buy an out-of-the-money put to protect the downside and finance the put by writing an out-of-the-money call that caps potential profit on the upside. The position is known as a collar, a split-strike conversion, or several other names, depending on the market. Bernie Madoff called it a split-strike conversion and stated that following the strategy with equity index options was how he achieved consistently high returns with very low volatility. As we have now learned, he actually employed the more direct strategy of reporting fictitious returns and covering investors’ withdrawals by stealing the funds of other investors in a vast Ponzi scheme. This article analyzesMadoff’s claimed returns and shows that they were essentially impossible from trading split-strike conversions. Bernard and Boyle then extend the analysis to establish theoretical properties of the returns that can be achieved by the strategy, including bounds on the maximum Sharpe ratio (which is well below the Sharpe ratio claimed by Madoff) TOPICS:Options, risk management, financial crises and financial market history

Mr. Madoff's Amazing Returns: An Analysis of the Split-Strike Conversion Strategy

It is now known that the very impressive investment returns generated by Bernie Madoff were based on a sophisticated Ponzi scheme. Madoff claimed to use a split-strike conversion strategy. This strategy consists of a long equity position plus a long put and a short call. In this paper we examine Madoff's returns and compare his investment performance with what could have been obtained using the split-strike conversion strategy based on the historical data. We also analyze the split-strike strategy in general and derive expressions for the expected return, standard deviation, Sharpe ratio and correlation with the market of this strategy. We find that the Madoff's returns lie well outside their theoretical bounds and should have raised suspicions about Madoff's performance.

Evolutionary Enforcement At The Securities And Exchange Commission

Hundreds of critics in the past eighteen months have heaped abuse on the SEC Enforcement Division. How could the Division have missed so much misbehavior on Wall Street? How could the Division’s young lawyers have been charmed by Bernie Madoff and thwarted from discovering his terrible crimes?

The SEC After The Financial Meltdown: Social Control Over Finance?

2008 was not a good year for the Securities and Exchange Commission (SEC). In December, the revelation of Bernie Madoff’s massive Ponzi scheme focused attention on the agency’s failure to detect this long-running fleecing of investors. In September, SEC Chairman Christopher Cox ended the Consolidated Supervised Entities Program after three of the investment banking firms in the program disappeared and the remaining two converted to bank holding company status. The change seemed to expose the SEC as a weak prudential regulator as compared to the Federal Reserve. During the year, as various proposals for financial reforms swirled, it often seemed like the SEC was headed for the dustbin. The focus was on systemic risk and the consolidation of regulation which focused attention away from the SEC and towards the Federal Reserve as the regulator of choice. It looked like a game of musical chairs in which the SEC was slow to find its place.