by Guy Lawson
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.
www.crownpublishing.com
CROWN and the Crown colophon are registered trademarks of Random House, Inc.
Library of Congress Cataloging-in-Publication Data Lawson, Guy.
Octopus : Sam Israel, the secret market, and Wall Street’s wildest con / Guy Lawson.—1st ed.
p. cm.
1. Israel, Samuel, 1959-2. Stockbrokers—United States—Biography. 3. Hedge funds—United States. 4. Wall Street (New York, N.Y.) I. Title.
HG4928.5.L39 2012
332.64′524092—dc23
2012003095
eISBN: 978-0-30771609-5
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
Contents
Cover
Title Page
Copyright
Dedication
Epigraph
Author’s Note
Introduction
CHAPTER ONE.
Trust
CHAPTER TWO.
Upstairs
CHAPTER THREE.
Front-Running
CHAPTER FOUR.
Other People’s Money
CHAPTER FIVE.
The Problem
CHAPTER SIX.
Boy in the Bubble
CHAPTER SEVEN.
Scumbaggery
CHAPTER EIGHT.
The Trump House
CHAPTER NINE.
Adventure Capital
CHAPTER TEN.
Octopus
CHAPTER ELEVEN.
The Shadow Market
CHAPTER TWELVE.
The Big Lie
CHAPTER THIRTEEN.
As Real as Rain
CHAPTER FOURTEEN.
Exploding Heads
CHAPTER FIFTEEN.
Deliverance
CHAPTER SIXTEEN.
The Snake Pit
CHAPTER SEVENTEEN.
Yamashita’s Gold
CHAPTER EIGHTEEN.
Redemption
CHAPTER NINETEEN.
The Afterlife
Epilogue
Acknowledgments
Author’s Note
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 Israel’s account, interviews were conducted with the FBI in New York and the Serious Fraud O!ce in London. I reviewed thousands of pages of legal documents, analyzed hundreds of "nancial records, and conducted extensive Freedom of Information searches. Much of the evidence related to Israel’s case had been placed under seal by federal prosecutors in an attempt to keep the record secret—but I was able to obtain it all through con"dential sources. Over the years, I also interviewed dozens of Israel’s associates, legitimate and criminal. Traveling to Europe multiple times, where the amazing "nale to Israel’s adventure took place, I uncovered ongoing international "nancial frauds that have yet to be investigated by the authorities—conspiracies that continue to this day.
When I began to talk to Israel, he promised to tell the truth, no matter how un#attering 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 con"rmed and/or corroborated his account, if not his interpretation. Inevitably, however, there are twists and turns in Israel’s 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. Con"dence 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 I’ve had to use pseudonyms (a complete list appears on this page). Anyone interested in further information regarding the scams and scammers portrayed in these pages can visit guylawson.com or my page on Facebook.
Guy Lawson
New York, New York
July 2012
Introduction
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 suicide—or at least the appearance of it. For nearly a decade he’d 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 !nal act of atonement—and 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 con"icting emotions. The thought of perishing in prison !lled 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 !nancier 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 Bayou’s 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 dream—from the Reagan tax cuts of 1981 to Bayou’s 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 wasn’t just another Wall Street scammer. There was another story—one that hadn’t 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, he’d discovered a secret bond market run by the Federal Reserve. The labyrinth of this shadow market dwarfed Israel’s own grand deception. Grappling with the many-tentacled beast he came to call the Octopus, he’d often feared for his own life. As he traveled to the !nancial capitals of Europe—to London, to Zurich, to Frankfurt—his companions had been CIA hit men, moneyed aristocrats, and the puppeteers who controlled the world’s !nancial s
ystem. On this journey, Israel had glimpsed the terrifying reality exposed during the global !nancial crisis of 2008: Investment banks were perpetrating systemic fraud, the international !nancial system was a scam, and the Federal Reserve was operating a vast Ponzi scheme. At least that was the reality he’d experienced.
Driving onto Bear Mountain Bridge, Israel wondered if he’d ever know the full truth —or if the Octopus would once again succeed in remaining invisible. One thing he knew for sure was that he wasn’t going to allow himself to disappear into prison forever. As he neared his destination he concentrated on the speci!city of what lay ahead: the road, the bridge, the end. Reaching the middle of the bridge, he pulled to the side. “Suicide Is Painless” was written in the dust on the hood of the Envoy; he’d left a note at his house. Sam got out of the vehicle and climbed over a cement divider onto the pedestrian walkway that carried the Appalachian Trail over the Hudson River. The bridge had no surveillance cameras; only the video from the toll-booth recorded him as he disappeared from view. Looking around to see if he was being watched, he stepped onto a narrow ledge. He stared down: 156 feet, high enough to reach terminal velocity.
The suspension bridge seemed to sway in the haze. Sam told himself he wasn’t afraid.
He’d soon be forgotten, just another disgraced Wall Street scammer who got what he deserved. Body rain. He took a deep breath. He leapt …
CHAPTER ONE
Trust
All Sam Israel ever wanted to be was a Wall Street trader. For generations, the men of the Israel family had been prominent and hugely successful commodities traders. For nearly a century they and their cousins the Arons had been major players trading in co!ee, sugar, cocoa, rubber, soy, precious metals—the substance of modern American life. Along the way, the family became fantastically wealthy. Long before the term was coined, the Israels were real-life Masters of the Universe.
But it was Wall Street that attracted Sam, not the commodities market. As a boy growing up in New Orleans he’d sat on the lap of his legendary grandfather, Samuel Israel Jr., watching the ticker tape from the New York Stock Exchange and imagining what life was like in that distant place. When the Israels moved to New York and his father took a senior position in the family business, which had grown into a multi-billion-dollar multinational conglomerate named ACLI, Sam dreamed about trading stock in the skyscrapers of Lower Manhattan.
In the summer of 1978, at the age of eighteen, Sam got the chance to try his luck. At the time, he was a newly minted graduate of Hackley, an elite prep school outside New York City. Although the Israels were very rich, Sam was expected to earn his own pocket money. Thus he was spending the summer working odd jobs and training to try out for the freshman football team at Tulane University, alma mater of his father and grandfather. In the Israel family it was assumed that Sam would go to work for ACLI when he "nished college. He was smart, charming, athletic, extremely likable. But Sam had a propensity for lying. In his mind, they were harmless lies, teenage lies, about girls, sports, deeds of derring-do. It was his way to be liked, to be funny, to get attention, to make himself feel good.
Sam had been blessed with all the good fortune any young man could hope for. But he didn’t want to follow in the footsteps of his illustrious ancestors. He didn’t want to be the bene"ciary of nepotism, with all of its attendant resentments and insecurities.
Despite the Israel family’s outward appearance of perfection, Sam’s relationship with his father was deeply troubled. Sam wanted to be his own man, shaping his own destiny, proving his own worth.
“My father asked me if I wanted to come into the family business,” Israel recalled.
“But I said no. I didn’t want to be like my father in any way. I was only a kid, but I could see what was going on. My father had gone into the business, and his father had treated him poorly. My grandfather was always on my father about one thing or another. Nothing could ever please my grandfather. My father was doomed to that life.
He was never going to break away and be on his own. It would’ve been the same for me.
“If I became a Wall Street trader, I wouldn’t be working for my father. I’d be trading stocks instead of commodities. It may seem like a small distinction, but it was huge to me. At my father’s business I’d be the kid who had been born into the right family. On Wall Street I’d be on my own. I was always told that the New York Stock Exchange was the greatest place on earth. It was where the smartest people went. It was the hardest place to get ahead. Wall Street traders lived by their wits. It wouldn’t matter that my last name was Israel. It wouldn’t matter who my father and grandfather were. On Wall Street, anybody could make it—if they were tough enough and smart enough.”
One "ne June afternoon in his eighteenth year, Sam was working as a bartender at a garden party in his uncle’s backyard. The crowd was middle-aged, well dressed, seemingly unremarkable—pretty wives and pale-faced men with paunches and high blood pressure, drinking too much, smoking too much. But Sam knew that beneath the milquetoast appearances, these men were Wall Street’s ruling class.
Standing behind the bar, Sam was approached by a heavyset man in search of a cocktail. The man was just under six feet tall, weighed more than two hundred pounds, and had an unruly mane of brown hair and a ruddy complexion. He was wearing expensive clothes, but he was slightly disheveled and had the twinkle in his eye of a prankster. Sam instantly recognized him. Standing before Sam was the famous Freddy Graber—the man they called “the King” on Wall Street. Sam had heard his father and uncles talk about Graber’s exploits. Still only in his early thirties, Graber was already famous for his unbelievable ability to trade stocks.
Instead of accepting a partnership o!er at Lehman Brothers, Graber had started something called a “hedge fund.” In the seventies, hedge funds were exceptionally rare and mysterious, a secret realm run by the high priests of high "nance. Only the wealthiest people even knew of the existence of hedge funds. Only the greatest traders gained entrée to the select society. Freddy Graber was in that number. His hedge fund acted as a broker for major investment banks, clipping a few pennies in commission for executing trades on the #oor of the New York Stock Exchange for companies like Goldman Sachs and Morgan Stanley.
But Graber’s true genius was the way he traded his own money. Unlike most Wall Street traders, Graber didn’t bet with other people’s money. This was a dare within a dare. Normally traders who “ran” money invested their own funds, along with money given to them by banks, insurance companies, pension funds, high–net worth individuals. Not Graber. He traded for himself exclusively. His stake in the early seventies had been $400,000. In less than a decade he’d turned it into $23 million.
Cash. It was the kind of feat that had made the Israel men famous. In 1898 Sam’s great-uncle Leon Israel had started with $10,000, and by 1920 he had $25 million—the equivalent of $500 million today.
Graber carried himself with con"dence that bordered on arrogance. But at the same time he was unpretentious, quick to grin, instantly likable. He was also a serious drinker. Graber asked the young Israel for a vodka and cranberry juice on the rocks, with a chunk of lime. Israel handed over the drink and introduced himself—knowing his last name would be recognized. Graber was polite but didn’t take much notice of the eager teenager.
When Graber returned for another drink a few minutes later, though, Sam was ready.
“Vodka and cranberry on the rocks,” Sam said, mixing the cocktail before Graber could order. “With a chunk of lime.”
“You have a good memory, kid,” Graber said. “You any good with numbers?”
“I’m very good with numbers,” Israel said.
“You could make a living doing what I do,” Graber said.
“I’d love to see what you do, Mr. Graber,” Israel said.
“Come up and see me anytime,” Graber said, handing over his card. “The door is always open.”
From Graber’s o!hand manner, Israel knew it was an empty invitat
ion. But Sam wasn’t going to let this opportunity pass him by. The next Monday morning, he dressed in his best suit and caught the early train to Manhattan.
“When I walked up the subway stairs into the sunlight at the corner of Wall Street and Broadway for the "rst time it was like I was entering a new universe,” Israel remembered. “The streets were teeming with action. Secretaries hustled by. Shoe shine guys, newsstand boys, hot dog vendors, everyone was on the make. To me it was the most incredible place on earth. It was like a giant casino. It was pure glamour. It was everything I’d dreamt about.”
Frederic J. Graber and Company operated on the thirtieth #oor of 1 New York Plaza, a "fty-story skyscraper that housed Goldman Sachs, Morgan Stanley, and a host of powerful law "rms. Graber’s trading room was in a suite of o$ces with a dozen or so other independent hedge funds. At the time there were only a few hundred funds running perhaps a few billion dollars, compared with the trillion-dollar industry that would emerge in the coming decades. Israel stood awkwardly at the threshold watching the early-morning commotion. Sitting behind a large marble desk in the trading pit, Graber didn’t recognize Israel at "rst. Then Sam summoned the courage to remind the older man of his o!er. Graber grinned at Israel’s nerve. He could have sent Israel away, but he was gregarious by nature, inclined to be generous, and Sam was obviously keen.
Graber sent Sam down to the trading #oor to see how things worked there. By sending him to the #oor, Graber was making it plain that Sam was on his own. It could easily have been his first and last day. But Sam had other plans.
In the late seventies the #oor of the New York Stock Exchange was a madhouse, a roiling sea of humanity being tossed by waves of greed and fear. The exchange was divided into a series of rooms, each with huge boards to record the hundreds of millions of dollars being traded at every moment, each "lled with brokers and clerks screaming their orders and jostling for every eighth of a point. In this oversized fraternity house, the kind of place where men played Pin the Tail on the Donkey and sprayed shaving cream for practical jokes, the intensity was so high a trader could fall over from a heart attack and trading wouldn’t stop. There would be a moment of concern, perhaps, as the trader lay gasping on the #oor, but trading would go on as the paramedics arrived with a stretcher and took him away.