by Guy Lawson
“He was following me,” Sam recalled. “I just knew it. For all I knew, he could have been trying to kill me. I had no choice. I had to run. I went back into the bathroom and found a window. I climbed on a toilet, went through the window, and got out into an alley. I fell into a garbage can as I landed. I was wearing a suit—a new Zegna I’d just bought. I didn’t care. I ran down the alley and jumped over a spiked iron fence. I caught my leg on the fence but I got myself out of it. I ran all the way to meet Bob in Grosvenor Square. I was convinced I was going to be murdered.”
Reaching the bench, Sam sat next to Nichols, panting.
“I was followed,” Sam said. “I tore my fucking suit.”
“Did you lose them?” Nichols asked.
“I think I did,” Sam said. He glanced along the street. None of the faces were familiar.
No one was looking their way, it seemed. Israel was drenched in sweat. His back had been wrenched.
“I told you to be careful,” Nichols said, lighting a cigarette.
THE COUNTER SPY SHOP was located at 59 South Audley Street in Mayfair—a brisk !ve-minute walk from Claridge’s. After the incident, Sam went to the store to purchase equipment to help him take countersurveillance measures. The Junior Attack System consisted of a powerful infrared camera with a long-range lens and microwave transmitter. The system was disguised in a plastic lunch box that Sam could leave wherever he liked—in a car, his hotel room, the business center at the Grosvenor—to record what was happening. The device had a remote trigger. The price was more than $5,000. But Sam was willing to spend any sum for peace of mind—an increasingly difficult state for him to achieve under the sway of his Svengali.
Nichols told Sam he never traveled without a gun. Carrying a concealed handgun was illegal in the United Kingdom, but Nichols was always armed with a Browning semiautomatic in a shoulder holster. If he had need for more weapons, Nichols had a contact in London who supplied him with whatever he needed. The man was Pakistani.
Nichols called him Kumar. He was a cousin of President Musharraf of Pakistan and had high-level connections in the Pakistani military. Kumar was able to supply Nichols by using the Pakistani diplomatic pouch to transfer arms throughout Europe.
Nichols said Kumar was working on a water puri!cation project outside Karachi. It was one of the projects approved by the Chosen to keep Pakistan on the side of the United States in the War on Terror. Nichols’s man also had extensive contacts among the tribes of northern Pakistan and exclusive knowledge about the operations of Al Qaeda. Nichols intimated that Kumar knew the whereabouts of Osama bin Laden—and why the Pakistani army refused to hand him over to the Americans. The claim that Kumar could locate bin Laden was typical of Nichols’s grandiosity: The self-styled spy constantly told stories that placed himself at the center of world events. The entire American intelligence apparatus had failed to !nd bin Laden, but a sallow-faced drunk sitting in a bar in London knew his whereabouts?
Sam reveled in Nichols’s intrigues. But the weeks continued to pass, and not a single trade came to fruition. The Hardwick initiative had come to nothing. Nichols said that the trading schedule for the shadow market was limited but reassured Sam that his opportunity would come soon. Still, Sam was growing increasingly frustrated. On weekends he #ew back to New York to see his son. He returned to London on the red-eye on Sunday. He told Nichols that every day he wasn’t trading, Bayou’s investors were losing money. The opportunity costs for his investors ran to millions. The waiting and uncertainty were intolerable. So was the ongoing chance of Bayou’s fraud being discovered.
Sam needed to create leverage. In frustration, on May 10 Sam wired $150,999,847.42
back to Bayou’s account in Citibank in New York. The transfer was potentially disastrous news for Nichols. Keeping the money in play was a crucial component of the con. Nichols needed a new big store, and he needed it fast.
So it came to pass that the day after Sam wired back to the United States, Nichols announced that he’d discovered another way to enter the shadow market—a path that was even better than night trading. Over drinks at the Royal Club, Nichols introduced Israel to a man named George Katcharian. Nichols said Katcharian was highly experienced in alternative investment strategies—including high-yield securities.
Katcharian was from Denmark, in his early !fties, !ve-!ve, with an intense but proper manner. His large nose framed dark eyes with large bags underneath, giving him the appearance of a jet-lagged international businessman burdened by heavy responsibilities.
Katcharian spoke perfect English, with a slight Danish in#ection. He began to discuss the securities that he traded. Medium-term notes were arcane, Katcharian allowed.
Israel struggled to understand the details of precisely how such fantastical pro!ts could be made so quickly. The di"erence in the price—the arbitrage—was enormous, more than a 50 percent discount on the face value. Every bank and hedge fund in the world had rooms !lled with traders scouring the market looking for assets that were mispriced. The adage on Wall Street was that there was no such thing as a hundred-dollar bill lying on the sidewalk—which was another way of saying there was no such thing as free money. Bonds issued at less than half of their real value would attract a swarm of traders, Israel knew. That explained the need for secrecy. But how did the market actually function?
Katcharian used a real-world example. He was currently involved with Deutsche Postbank AG, one of Europe’s largest retail bankers. In Germany, Postbank was the essence of dull respectability, with 14 million customers and more than $250 billion in assets. But Katcharian said Postbank was also secretly one of the “prime banks” that traded in the premarket. Then he proved it to Sam. At Katcharian’s suggestion, a regional director of Postbank sent a letter addressed to Sam regarding the purchase of bank “debentures”—another word for the medium-term notes, Katcharian explained.
The letter purported to represent Postbank’s !rm commitment to purchase senior unsubordinated bank debenture bonds in the amount of $2 billion. The securities would be issued by a European bank with an AA rating. “Said instruments shall be seasoned, live and existing, and shall have a maturity of ten years and an interest coupon of 7.5%
per annum,” the director wrote. “Such instruments will be purchased for several of our clients and will be kept on deposit in their portfolios. Please provide us a quotation at your earliest convenience. Time is of the essence.”
The discount on the debentures promised Sam a pro!t of more than $100 million in a matter of days. Katcharian explained that there were di"erent ways of structuring the deal. Bayou’s $150 million in Citibank in New York could provide the collateral for the whole deal, if he acted quickly. But there were complications to doing it that way—
technical problems, the kind of thing encountered in the normal course of business. It wasn’t the ideal structure. The approach Katcharian preferred was a joint-venture agreement. On one side would be Israel and the Humanitarian Coalition. On the other would be a company called Intercontinental Securities Limited—or ISL. The company was fronting for a clandestine intelligence agency, Sam was told.
“I de!nitely picked up the vibe that Katcharian was connected to intelligence agencies,” Israel said. “It was clear that he’d dealt with British and Danish intelligence regarding the bonds. He had access to the bankers at Postbank. He had access to the program. Access was the key. I didn’t really care about what structure was used—as long as the deal came off.”
A meeting of the principals was called. Postbank’s o$cer #ew to London from Hamburg. Sam and Bob and Katcharian and the German banker gathered at the Promenade in the Dorchester Hotel, an ornate !ve-star restaurant decorated in gold and green. The German had managed money for high–net worth individuals for Postbank for years, Katcharian said. The banker had recently been promoted to run transactions in the shadow market, gaining entrée to the highest level of high finance.
The deal was straightforward, Katcharian said. The joint-vent
ure agreement structure ensured ease and certainty. Sam said he was prepared to act with dispatch—he was “ready, willing, and able,” in the language of the shadow market.
As the group !nished eating, Katcharian said he had another meeting to get to. Sam watched Katcharian depart and waited a few moments before he said he had to leave as well. Quick-stepping through the lobby, he spotted Katcharian exiting through the revolving doors onto Park Lane. Sam followed. The Dorchester Hotel was near Nelson’s Column, and the streets were packed with tourists. Katcharian walked for six blocks, wending his way through the streets of Mayfair. Near Grosvenor Square he hailed a taxi. Israel got in a cab and followed. The two cabs made their way through the afternoon tra$c. In Chelsea, near the banks of the Thames, Katcharian got out of the taxi and entered a town house.
“He had his own key, so I !gured it was where he lived,” Israel recalled. “I waited outside for a few hours. Just lingering in the street. Then Katcharian came out of the house arm in arm with another man. It was obvious he was gay. He sure didn’t seem like he was a family man, like he’d told me.
“I tailed him because I wanted to !nd out who all the players were and what was going on. I wanted to know who I was doing business with. I had to be paranoid. I knew from Bob that there were a lot of factions out there that were trying to get me. All the cloak-and-dagger stu" was driving me out of my mind. I was constantly looking over my shoulder wondering who was following me. I could feel the presence of people watching me.”
SAM RETURNED TO NEW YORK to see his son. Now that Sam was no longer trading at all, he needed to come up with a di"erent way of deceiving Bayou’s employees and members. Pretending that he was trading from his desk in the chapel of the Trump house provided one scrim for the fraud. But how could he keep creating investor reports when all the sta" knew he was in London? A Bayou employee was responsible for creating the net asset value reports—NAVs for short. His job consisted of taking the numbers from Sam, along with a summary of his commentary, and then plugging the returns into the document forwarded to Bayou’s investors. The man Israel had picked for the job was a former school teacher, a gentle soul whose passivity was a major reason Sam had recruited him in the !rst place. Sam needed to convince him to send out NAVs he knew to be false.
“I called him to come see me at my house,” Sam recalled. “I took him over to the chapel, to the loft where I’d installed a set of drums. I asked him to pick out any CD on the shelf and I would play along. So he picked out Black Sabbath, an old one called Master of Reality. I started to drum along with the band. He couldn’t believe it. I was really playing. He was amazed. He knew I’d been a beginner only a few months ago.
“So I turned o" the stereo and sat down to talk to him. I told him that things change in life—sometimes really quickly. I told him about Bob and the trading I was doing in London. I told him that our lives were all going to change for the better. I said that I’d signed a contract that would put me in prison for thirty years if I revealed the nature of the trades I was making. I said that I trusted him and cared for him—and I knew he felt the same way.
“I said we’d have to make up the commentary every week. The returns were real but we couldn’t reveal where they were derived. I asked if he had a problem with that. He would have to work with Dan because I wouldn’t be around a lot. He said that if Dan agreed not to yell at him and bully him he would do it for as long as we needed. I didn’t tell him about the Problem, of course. I just said we were going to make a lot of money but he couldn’t reveal where it was coming from. It was sort of a white lie. I believed in the trades, so I wasn’t lying to him about that.”
In mid-May Postbank gave notice that it was ready to receive $138 million to commence Katcharian’s trading program. The account was in the name of ISL—with no mention of Bayou or Sam Israel. “I shall hereby con!rm that we are a reputable bank that values the service of our clients and who respects their instructions and acts promptly and accordingly,” the Postbank officer wrote to Israel. Sam refused to send the money into ISL’s account. This time Sam was proceeding with caution, or at least his version of it.
“Maybe I was stupid, but I wasn’t crazy,” Israel recalled. “The money was supposed to only be for my signature. But it was going to be Katcharian’s company’s name? I was assured that Postbank wouldn’t release funds without my approval.”
Not wiring the money caused problems, Sam was told. He returned to London and met with Katcharian and Nichols. It wasn’t clear what was going on with Postbank, Katcharian said. Katcharian lowered his voice and said he had con!dential information to share. The Dane said that he believed there were problems inside the German bank—perhaps even fraud. The German banker was trying to scam Sam. This was a devastating turn of events: Nichols had warned Sam of the frauds and wannabes that populated the shadow market.
But Katcharian had good news. He had another way to trade—an easier and faster way to get into the program. He had a Fed trader in the Netherlands who could get Israel into the market immediately. The return on the secret medium-term notes that were available in this trade would be 100 percent in one week. Israel’s cut would be 45
percent. Once Israel was able to regularly trade MTNs, through Katcharian’s contact, he would be able to double his money every two weeks. Katcharian’s solution sounded brilliant. In this new deal there were no up-front fees or broker charges. Tedious formalities would be replaced by a nimble deal that could be repeated rapidly.
Sam #ew home to share the good news. Back in New York, Sam was euphoric. Debra Ryan immediately noticed the change in his spirits. “He was ecstatic,” Ryan recalled.
“Not because of the money he said he was going to make. Sam told me he was going to be a billionaire. He said he was being groomed to be the next George Soros. He said he was trading government money—CIA money. It was dangerous because there was a whole secret world of money. He told me about Bob and Ellen. He said they needed his intelligence and his trading skills. I didn’t know what he was talking about. Who knows? Sam was the brilliant trader. I’m a painter. What do I know?
“But what really excited him was the charitable work he was going to do. He was going to set up foundations all around the world to help people. He said that even doing good was dangerous. Like curing cancer or AIDS. A lot of people make money from treating cancer and AIDS. The evil forces will kill to protect their fortunes. I didn’t know what to make of what Sam was saying. It sounded scary. I was terrified for him.”
Nichols called from London and said the deal had been postponed temporarily. Rival factions were trying to stop them, Nichols said. He told Sam to be on high alert. He was being watched. Sam hired a security !rm to do a radio frequency spectrum analysis of the Trump house and Bayou’s o$ces. Hedge funds were notoriously secretive, and it wasn’t unusual for traders to hire security companies to protect their proprietary programs. But Sam wasn’t trying to thwart a rival fund; he was trying to outwit the secret world government.
“Sam was convinced there were agents trying to keep him out of the trade,” Dan Marino recalled. “He said it was why the trade was being delayed. He was positive that the boathouse was filled with bugs and taps on the phone lines. They were hearing what we were saying and developing plans to shut Bayou down.”
In Sam’s absence, Dan Marino had been forced to keep Bayou a#oat by himself. Since the fraud at Bayou began, Marino had tried to deal with his anxieties through food. As a result, he’d gained more than !fty pounds, weight that transformed him from stout to corpulent and then to grossly overweight. Marino had also started to use Bayou’s money to slake other thirsts. He purchased an eight-thousand-square-foot mansion on lush and lovely Bayberry Lane in Westport, Connecticut, for $2.9 million in cash. Set on two acres with a swimming pool, the house matched Marino’s vision of wealth and elegance. Wandering the mansion and marveling at the designer touches—the wine cellar, the soaring ceilings, the massive master bedroom—he dreamed up plans to build a giant
model railroad in the attic.
Lacking con!dence around women, Marino had pounced on an opportunity to invest in a fashion company. A young designer named Holly Kristen had developed a line of dresses. Marino thought Kristen was attractive and talented, though he had no knowledge of the fashion industry. But Kristen’s assistant was the prettiest girl he’d ever seen. Marino was in. Starting with $1 million, Marino funded Kristen’s !rst big show in Manhattan and harbored the fantasy of asking Kristen’s assistant out on a date. As Kristen’s !nancial backer, Marino was invited to go backstage at the fashion show, to roam through rooms teeming with half-naked models.
“I had no life,” Marino said. “I had material possessions but they didn’t satisfy the soul. I never had a good night’s sleep because of the way the Problem weighed on me constantly. I would go to bed at ten and get up at three in the morning. A lot of times I’d close the door to my o$ce in the middle of the day and pass out at my desk. I had 150 balls in the air all the time. I wasn’t the greatest manager maybe, but I was a magician working with what was available to me at Bayou.”
Over the months, John Ellis and his colleagues had come to Marino with more than a dozen investment opportunities. Adam Air was a company created by a former Goldman Sachs partner that was going to build very light jet airplanes for the private market. Marino was told it would be di$cult to be permitted to invest, as it was exclusive to those lucky few who were socially connected. Marino imagined that Bayou could buy a dozen or more of the small planes and start an air taxi business for high–net worth individuals—a preposterous diversion from the fund’s stated business model. But the company lacked direction and !nancing and ended up in bankruptcy—losing virtually all of Bayou’s money.