Guy Lawson - Octopus: Sam Israel, the Secret Market, and Wall Streets Wildest Con

Copyright 2012 by Guy Lawson Shark World Productions LLC /
Guy Lawson

All rights reserved
Published in the United States by Crown Publishers, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York.
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Library of Congress Cataloging-in-Publication Data

Lawson, Guy.
Octopus : Sam Israel, the secret market, and Wall Streets
wildest con / Guy Lawson.1st ed.
p. cm.
1. Israel, Samuel, 1959- 2. StockbrokersUnited StatesBiography. 3. Hedge fundsUnited States. 4. Wall Street (New York, N.Y.) I. Title.
HG4928.5.L39 2012
332.64524092dc23
2012003095

eISBN: 978-0-307-71609-5

Jacket design by Christopher Brand
Jacket illustration by Brian Levy

v3.1

For Lucy and Anna

We are never deceived, we deceive ourselves.

Johann Wolfgang von Goethe

In reporting this story over a period of three years, I spent hundreds of hours interviewing Sam Israel in prison and on the telephone. I also exchanged countless e-mails with Israel and Dan Marino, the former CFO of Bayou Funds. To authenticate Israels account, interviews were conducted with the FBI in New York and the Serious Fraud Office in London. I reviewed thousands of pages of legal documents, analyzed hundreds of financial records, and conducted extensive Freedom of Information searches. Much of the evidence related to Israels case had been placed under seal by federal prosecutors in an attempt to keep the record secretbut I was able to obtain it all through confidential sources. Over the years, I also interviewed dozens of Israels associates, legitimate and criminal. Traveling to Europe multiple times, where the amazing finale to Israels adventure took place, I uncovered ongoing international financial frauds that have yet to be investigated by the authoritiesconspiracies that continue to this day.

When I began to talk to Israel, he promised to tell the truth, no matter how unflattering or brutal it was. I will not lie to you, he said. Given his history, I treated this vow with profound skepticism. Indeed, I soon discovered many of the events he described did defy belief. But I also learned that in virtually every instance where the facts could be checked, other sources confirmed and/or corroborated his account, if not his interpretation. Inevitably, however, there are twists and turns in Israels tale that have to be taken on his word alone. Readers should bear in mind that this is the story of a self-confessed con man. Confidence games are a strange blend of fact and created fact, the narrative constructed by a con artist luring his prey into a world of deception. So it was for Israel as he perpetrated his fraud at Bayou and then ventured into the deadly embrace of the Octopus.

Readers should also be aware that, owing to the legal complexities of publishing the names of people involved in crimes that remain unprosecuted, in several instances Ive had to use pseudonyms (a complete list appears on or my page on Facebook.

Guy Lawson
New York, New York
July 2012

On Monday, June 9, 2008, a disgraced Wall Street hedge fund trader named Samuel Israel III decided to end it all. Given the desperation of his circumstances, the only way out seemed to be suicideor at least the appearance of it. For nearly a decade hed been the mastermind of one of the largest and most complex frauds ever perpetrated on Wall Street. The discovery that his $450 million hedge fund was a Ponzi scheme had cost Israel his reputation, his fortune, his freedom. Sentenced to twenty years in prison, he was almost certain to die behind bars. Once he had been the promising scion of a wealthy and prominent family of traders; now, at age forty-nine, he was at the end of his rope. Years of heavy substance abuse, a dozen back operations, and open-heart surgery had left his body in ruins. Israel was addicted to painkilling opiates and dreaded the prospect of kicking drugs in prison. Broke and broken, he reasoned that if he was gone at least his children could collect on his life insurance policy. Ending it all would also allow him to retain a measure of dignity and autonomy. It would be a final act of atonementand defiance.

On the cloudless June day that Israel was supposed to report to federal prison in Massachusetts to begin serving his sentence, he drove his red GMC Envoy toward Bear Mountain Bridge in upstate New York. The suspension bridge spanned the Hudson River in a state park an hour north of Manhattan. Making his way along the winding road, Israel was tormented by conflicting emotions. The thought of perishing in prison filled him with dread. So did the prospect of what he was about to do. As he rounded a curve, the half-mile-long bridge came into view. He tried to calm his racing thoughts. Jumping to your death was the time-honored fate for a failed financier like Israel. Body rain was the term on Wall Street.

Like the legendary Faust, Israel had sold his soul in return for earthly powers. Standing before a wall of computer screens in Bayous beautiful converted boathouse overlooking Long Island Sound, he had played the role of a modern-day necromancer who could create money out of thin air. For years, Bayou had provided investors with an annual performance of 18 percent. But it had been just that: a performance. Like Faust, Israel had been granted exactly twenty-four years to live out his dreamfrom the Reagan tax cuts of 1981 to Bayous implosion in 2005. Now it was time to give the devil his due.

As Israel neared the bridge, he tried to make sense of the swirl of events that had pulled him into an abyss. He wasnt just another Wall Street scammer. There was another storyone that hadnt been told. At the height of his fraud, as he desperately searched for a way to make hundreds of millions of dollars to save Bayou and himself, hed discovered a secret bond market run by the Federal Reserve. The labyrinth of this shadow market dwarfed Israels own grand deception. Grappling with the many-tentacled beast he came to call the Octopus, hed often feared for his own life. As he traveled to the financial capitals of Europeto London, to Zurich, to Frankfurthis companions had been CIA hit men, moneyed aristocrats, and the puppeteers who controlled the worlds financial system. On this journey, Israel had glimpsed the terrifying reality exposed during the global financial crisis of 2008: Investment banks were perpetrating systemic fraud, the international financial system was a scam, and the Federal Reserve was operating a vast Ponzi scheme. At least that was the reality hed experienced.