Bernard Madoff Scandal

3036 Words Mar 1st, 2012 13 Pages
Accounting Fraud Examination By: Wagner
October 12, 2011

Introduction As we look back on the first decade of the 21st Century, we see that Corporate America and the Financial Markets were riddled with corruption and fraud. At the beginning of the decade we saw the likes of Enron and WorldCom become insolvent due to accounting frauds of epic proportions. The one case that stands out amongst all of them is the Bernard Madoff case, which is considered to be the largest fraud case of all time. “Madoff managed to lure billions of dollars away from huge charities, as well as wealthy individuals in both the United States and Europe by getting them to invest in his hedge fund. He did so by claiming extraordinary returns (generally
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(Gregoriou et al, 2009). It is easy to see why people had no problem giving him their money to invest with returns like those. Mr. Madoff had a surprising simplistic approch to investing, he called it a split-strike conversion, better know to some as a collar or bull spread. 1. “Buy a basket of stocks highly correlated to the S&P 100 index. 2. Sell out-of-the-money call options on the S&P 100 with a notional value similar to that of the long equity portfolio. This creates a ceiling value beyond which further gains in the basket of stocks are offset by the increasing liability of the short call options. 3. Buy out-of-the-money put options on the S&P 100 with a notional value similar to that of the long equity portfolio. This creates a floor value below which further declines in the value of the basket of stocks are offset by gains in the long put options” (Gregoriou et al, 2009). As illustrated below.
Exhibit 2: Track record of Fairfield Sentry Ltd, one of the Madoff split-strike conversion strategy feeder funds.

(Gregoriou et al, 2009).

To intice new and continued investments from clients, he promised certain clients annual amounts up to at least 46% per year. He also told them that his fee would be approximately $0.04 per share commission on the stocks he traded for them. Contrary to these promises, he would use investor funds to meet redemption requests from

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