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

Bernard, Carole; Boyle, Phelim P.

doi:10.3905/jod.2009.17.1.062

Cited by 28 publications

(9 citation statements)

References 11 publications

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“…He found that Madoff's high and smooth returns were too good to be true. These findings are detailed in Markopolus (2005) and are confirmed by Bernard and Boyle (2009) and Culp and Heaton (2010).…”

Section: Literature Reviewsupporting

confidence: 57%

Madoff’s dirty money

Wilson

2019

JMLC

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Purpose The purpose of this study is to estimate the profits to JPMorgan Chase from the Madoff Ponzi scheme’s checking account deposits at the bank based on the data in Harbeck (2011). The Madoff Ponzi scheme was sitting on a cash hoard in excess of a US$1bn by the 1990s. Most of that money came into and stayed in the 703 account at JPMorgan Chase or it was transferred to one of the 11 other bank accounts. The author uses previously unanalyzed data from the Security Investor Protection Corporation (SIPC) to estimate JPMorgan Chase’s earnings from the accounts. Design/methodology/approach The author estimates the checking account balances of the Madoff Ponzi scheme with JPMorgan Chase and its ancestor corporation, Chemical Bank. He estimates the earnings from those large checking accounts and reinvests them in the stock price from 1986 to 2011. He uses data on the Madoff checking accounts released by Harbeck (2011) to estimate that JPMorgan Chase earned over US$900m from those large and suspicious checking deposits. Findings The US$907m in estimated profits from the Madoff Ponzi scheme bank accounts are much smaller than the US$2.6bn fine that JPMorgan Chase paid in 2014 to limit its liability for its dealings with Bernard L. Madoff. Any failure of anti-money laundering compliance in this case was very costly for the bank. Originality/value This is only study to analyze the Harbeck (2011) data to estimate JPMorgan Chase’s profits from the Madoff Ponzi scheme’s checking deposits. As JPMorgan Chase paid a US$2.6bn fine in this matter, it is relevant to look at how big the fine was relative to the profits the corporation may have earned from doing business with Bernie Madoff.

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Section: Literature Reviewsupporting

confidence: 57%

Madoff’s dirty money

Wilson

2019

JMLC

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“…Schemers usually states that a return on investment is a result of sound investment (Deason et al, 2015) or a result of applying a specific investment strategy. Bernard Madoff, for example, stated that he used a split-strike investment strategy to manage investor funds (Bernard and Boyle, 2009;Clauss et al, 2009;Gregoriou et al, 2009). Even though there is no agreement on the definition of Ponzi and pyramid schemes (Eisenberg and Quesenberry, 2014), in some definitions, both systems can be defined as "investment schemes that promise high or definite returns to investors but return given to investors is purely from funds deposited by other investors".…”

Section: Ponzi and Pyramid Schemesmentioning

confidence: 99%

Why are people trapped in Ponzi and pyramid schemes?

Hidajat

Primiana

Rahman

et al. 2020

JFC

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Purpose This paper aims to identify psychological factors that influence people to be involved in Ponzi and pyramid schemes. Design/methodology/approach A psychological approach to finance or behavioural finance is applied in this research because of the assumption that human beings are not always rational. The sample consisted of 98 investors in 11 cities in Indonesia who were or had invested in an investment program with a Ponzi or pyramid scheme. The snowball sampling technique was applied. Findings The conclusion is that optimism (emotional bias), confirmation bias, representativeness bias, framing bias and overconfidence (cognitive bias) positively influenced investment decisions related to Ponzi and pyramid schemes. Originality/value The novelty aspect of this research is the implementation of a behavioural finance perspective to answer and express the fascinating phenomenon of Ponzi and pyramid investment schemes.

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“…For example, Madoff's largest investors, such as Fairfield Greenwich, viewed themselves equally as victims in his fraud, despite having apparently failed to notice red flags or reportedly perform required due diligence. However, various studies argue that Madoff investors could easily have discovered the fraudulent nature of the returns series by performing operational due diligence or quantitative analysis (e.g., Bernard and Boyle, 2009;Clauss et al, 2009;Gregoriou & Lhabitant, 2009). The same point is made in the many lawsuits filed by the court-appointed trustee, Irving Picard, charged with recovering money for Madoff's victims inter alia against even such large and reputable banking institutions as HSBC and J P Morgan (Masters, 2010;Masters et al, 2011).…”

Section: Hedge Funds and The Intrusion Of Realitymentioning

confidence: 99%

Hedge funds as phantastic objects: a psychoanalytic perspective on financial innovations

Taffler¹,

Eshraghi²

2018

The Klein Tradition

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We start with a blank canvass. We are trying to sketch out a global macro view of the world for the next two years. And we are looking for wealthy patrons that want to buy that piece of art."Hugh Hendry, Founder and Chief Investment Officer of the Eclectica Hedge Fund, interviewed in the Financial Times (Williams, 2015, italics added) OverviewHedge funds are the "darlings" of the investment industry, with currently almost $3 trillion invested in them. These opaque, predominantly unregulated and exclusive investment products, which are only open to wealthy individuals and large investing institutions, possess a mystique and allure that renders them enormously attractive to investors. This is despite their less than stellar performance in recent years. Whereas the large majority of hedge funds are properly constituted and appropriately managed investment vehicles, some are less so, and the important implications of this are expanded upon in the chapter. Specifically in our analysis we draw on psychoanalytic theory, and especially the work of Klein and Bion, to explain the magical appeal of hedge funds to investors, and why they are willing to put so much of their funds and, by extension, their trust into such "exotic" and secretive investment vehicles. In particular, we explain the rapid growth in aggregate hedge fund assets under management until June 2008, followed by their subsequent dramatic collapse, in terms of the 2 conflicting emotions such investments evoke, and, from this, consider the implications of the excitement-generating potential underlying all financial innovations.Adopting the methodological approach of critical discourse analysis, this chapter explores how hedge funds were represented in the financial press, interviews with hedge fund managers, investor comments, and Congress hearings, before and after the burst of the hedge fund "bubble". In particular, we frame the human need for excitement in this discourse. Our study finds evidence demonstrating how hedge funds can be transformed in the minds of investors into objects of fascination and desire, with their unconscious representation dominating their original investment purpose. Drawing on the insights of the psychoanalytic understanding of unconscious fantasies, needs, and drives as these relate to financial markets, and parallels with dot.com mania, we show how hedge fund investors' search for "phantastic objects" (Tuckett & Taffler, 2008) and the associated excitement of being invested in them can become dominant, resulting in risk being ignored.We suggest that financial regulators need to recognise explicitly the key role powerful unconscious processes play in all financial activity at both individual and market levels, and the adverse consequences if such understanding is ignored. Public policy implications are that investors need to be protected from the encouragement to act out their unconscious fantasies to their financial detriment via appropriate regulation, and that stricter ethical guidelines for the hedge fund industry may be requ...

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

Cited by 28 publications

References 11 publications

Madoff’s dirty money

Madoff’s dirty money

Why are people trapped in Ponzi and pyramid schemes?

Hedge funds as phantastic objects: a psychoanalytic perspective on financial innovations

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