Octopus

by Guy Lawson

  † The license was published in The Last Circle.

  CHAPTER THIRTEEN

  As Real as Rain

  The fact that Israel had ceased trading had yet to be discovered by Bayou’s investors.

  But Bayou’s clearinghouse SLK was acutely aware of the situation. When Bayou pulled all of its money from its account months earlier, SLK’s senior management had become concerned. SLK was a division of Goldman Sachs, and the investment bank had made $1 million from Bayou in the !rst quarter of 2004 alone. It was virtually risk-free high-margin money, the kind of pro!t that had prompted Goldman to buy SLK. Since then upper management had been in steady contact with Bayou, trying to !nd out when Sam would get his trading groove back.

  “I told them Sam was doing some trades in Europe,” Dan Marino recalled. “I said we were also possibly considering a merger or a buyout with a European organization. I didn’t tell them the name of the !rm, as that was con!dential. Nor did I give them any details. I was very, very vague. I told them we would be back to our normal volume in the next four months. Then, if all went well, our volumes would increase quickly. I !gured that Sam was going to get the money from London so we’d have a lot more money to trade. After that conversation, the calls from Goldman died down.”

  The story the employees were given was more involved. Sam was trading through a European company, they were told. There was a chance of a merger with another fund, but they shouldn’t worry, as they would keep their jobs. The ploy worked. The sta" was well paid, and asking questions would result only in their being berated by Marino—and likely losing the best-paid job they’d ever had.

  On the rare occasions when Sam came to the boathouse, he told the sta" that he’d been invited by various European governments to consult on how to make the hedge fund industry there as dynamic as it was in the United States—a self-aggrandizing claim that made Marino cringe.

  “There was really no coordinated e"ort to fool the people in the o#ce,” Marino said.

  “The problem was going to be solved, Sam and I hoped. All of our troubles were going to go away. Nobody asked for details about what Sam was trading.”

  Bayou’s performance had remained outstanding—on paper. The fund’s biggest single investor was a fund of funds called Silver Creek. The head of Silver Creek wrote Sam to congratulate him on the continuing success and to up the ante on the $38 million they had in Bayou. “First of all thank you for the excellent stewardship of our money,” he wrote. “Your risk adjusted return is o" the charts. Two questions: How much money are you managing these days? And can we give you some more money?”

  IN A SURPRISING WAY, this was a lighthearted time for Sam, after years of unendurable pressure. He was falling in love with Debra Ryan. He was going to be rich beyond his wildest dreams. Feeling lucky, he bought a handful of tickets for the Big Mega Million lottery, which had a cash jackpot of $120 million. He worked diligently on the charity that was going to be a bene!ciary of the shadow market. He called the organization the American Academy of Excellence. It would be dedicated to educating disadvantaged children. “Students who are lacking essential educational resources and who are gravely economically disadvantaged and greatly underachieving academically will be the ‘target population’ graciously designated for tremendous assistance,” the mission statement said.

  One afternoon, he took the Nicholses to look at Chateau Lion du Lac, or “Lion of the Lake,” the Westchester mansion he was going to buy for $10 million. The twelve-bedroom, seventeen-thousand-square-foot house had a ten-acre lawn sweeping down to the Titicus Reservoir. There were both indoor and outdoor swimming pools. The interior was decorated with extravagance that would have pleased the Sun King, Louis XIV.

  “Why do you need this much house?” Debra asked, in amazement, when Sam showed her the prospectus for the estate. “It’s ridiculous to have two people living here. It’s pretentious.”

  “When you get to a certain status running a hedge fund, you can’t have a tiny little house,” Sam told Debra. “If you’re going to have dignitaries and heads of state over for dinner you’ve got to show them what you’re worth.”

  But Sam’s anticipation was tempered by underlying anxiety. As the trade neared, Nichols told Sam to speak in whispers around the house, convincing him that “they”

  were listening to him—without specifying who “they” were. If “they” could damage Sam or Bayou in any way, “they” would. Sam followed instructions, whispering to Ryan even when they were in bed. He mouthed sentences and directed movement through hand motions. It was as if he were acting in a real-world thriller. Sam saw the sinister explanation in everyday occurrences—an idling black town car, a telephone repair crew working the lines down the street, a stranger’s glance on the street.

  As in London, Sam amassed an array of electronic surveillance gadgets, like the Spion Orbitor Listening Device, a handheld instrument with a “patented super mini-microphone” encased in a parabolic sound dish. “The Orbitor’s ‘ears’ and ‘eyes’ are powerful enough to hear from one end of the football field to the other,” it was claimed.

  Nichols sniffed at Sam’s efforts.

  “It doesn’t matter what you have, Sam,” Nichols said. “They’re going to listen to your conversations without you knowing about it. They have devices that can hear you from a mile away. They’ve got satellites that can look through your house. They’ve got technology you don’t even know about.”

  FOLLOWING THE INSTRUCTIONS of George Katcharian, Sam instructed Marino to contact Citibank and arrange to transfer $138 million to Postbank in Germany. But Citibank had questions—and concerns. What was a long/short, buy/sell hedge fund like Bayou doing wiring that much money to an account in Germany? What kind of trade was Bayou proposing to make? Who was behind Katcharian’s company ISL? If Citibank permitted the transfer in such dubious circumstances, and Bayou was the victim of a scam, the bank could be held liable for failing to heed the telltale signs of fraud.

  After years of reckless indi"erence on the part of regulators and banks, it was a long-overdue development. Israel, Nichols, and Marino went to see two Citibank executives at their local branch. Although he had been sworn to secrecy—upon pain of thirty years in prison—Sam patiently explained the shadow market to the regional managers. The Fed bonds, the thirteen families, the massive discounts—Sam and Bob laid it all out.

  Billions would soon be pouring into Bayou’s co"ers, Bob said. The Citibank o#cials looked at them as if they had taken leave of their senses. They had never heard of a secret bond market. Sam said he wasn’t surprised. Their lack of knowledge fit with what Nichols had told him: Only the uppermost bank officials were aware of the market.

  Israel asked to borrow a conference room to call a high-ranking Citibank executive in Manhattan. The man was second in command, acting as the right-hand man to chairman Sandy Weill—who in turn was an old friend of the Israel family. Sam knew the executive through his father. After Sam told the Citibank o#cial about the shadow market, the man said he had never heard of it either. Sam was now genuinely shocked.

  How could it be? How high did a banker have to be to be initiated into the shadow market? Despite the man’s denials, Sam insisted the high-yield trades were real. Back and forth, the two men debated the subject for twenty minutes. When Sam hung up the phone he was shaken.

  “The Citibank people acted like Sam was from Mars,” Marino recalled. “We left quickly. In the parking lot Sam freaked out. He told me he had made a big mistake coming to Citibank. He said he shouldn’t have talked about the shadow market. He had exposed his hand.”

  That evening, Nichols and Sam decided they had to be more discreet. Talking about the shadow market was breaching the con!dentiality clause of their agreements.

  Talking also risked alerting other factions that they were so close to realizing their dream. Nichols said the reason the senior Citibank executive had pretended not to know about the shadow market was obvious: Saying the market didn’t exist was pr
oof of its existence. Citibank was obviously trying to block their efforts and steal their trade.

  WHILE ISRAEL CONTINUED TO TRY to convince Citibank to release Bayou’s funds, Nichols regaled him with tales. An alien really had been captured in Roswell, New Mexico, in 1947, Nichols said. The creature had died of an overdose of strawberry ice cream, according to Nichols. The annual $u season was a method for the Octopus to cull the human population, Nichols claimed. So it went, as Nichols downed whiskey in the evening and instructed Sam and visitors who happened by the house in alternate world history.

  But there was one story Nichols reserved for Sam and Sam alone. It was a tale so incredibly preposterous it could only be true. Or so Sam reasoned. It was a legend that had circulated in Special Forces circles for decades. The story was long and convoluted, and Nichols didn’t possess the historical expertise to explain the context. But Sam sat rapt as Nichols narrated a story that ranked with the greatest mysteries of all time. The tale of Yamashita’s gold was steeped in revisionist history and rife with the kinds of leaps in imagination common to conspiracy theories.

  Perhaps the most bizarre aspect of Nichols’s tale was this: It was true. At least in part.

  In essence. Maybe. The story began in the years before World War II. In the early 1930s the Roosevelt administration had been alarmed by the rise of fascism. American popular opinion was against “foreign entanglements,” so FDR had resorted to covert diplomacy to assist its allies. The British were secretly funded and armed by the United States long before they fought against Germany. The same thing was true for China, at least according to leading economic historians. Much of what had happened is missing from the historical record. But it is true that Chiang Kai-shek, the leader of China, had been !ghting the Japanese in Manchuria, as well as the Communist rebels of Mao Zedong.

  Legend has it that FDR had secretly provided billions of dollars’ worth of Federal Reserve bonds to Chiang Kai-shek in 1934. The Fed bonds had been issued to enable the Chinese to purchase arms.

  The Chinese had lost the war to the Japanese, and the nation’s then-capital had been overrun and plundered, an event known to history as the Rape of Nanking. Precious metals, jewels, artwork from antiquity, billions in bullion—the sovereign wealth of China had been stolen as the spoils of war. The Japanese had then secretly shipped the loot to the Philippines, which they had also conquered. By the time the Americans were threatening to retake the Philippines in 1944 it was no longer safe to transport the treasure back to Japan. The Japanese government had thus ordered a general named Yamashita to create a network of caves high in the jungle on the island of Mindanao to hide the loot. After the work had been completed, legend said, Yamashita gathered all the Japanese engineers and soldiers who had worked on the project into a tunnel to celebrate. The men drank sake and sang patriotic songs about “banzai” (long life), surrounded by stacks of gold bars. In one corner was a “motherbox” that held twenty-

  !ve boxes containing billions in the secretly issued American Federal Reserve bonds. At midnight, Yamashita quietly excused himself. As he departed, the entrance to the caves was dynamited, burying hundreds of men alive—ensuring that the location of the treasure would remain secret.

  The hunt for Yamashita’s gold had been going on ever since. For decades, soldiers of fortune had traveled to the island of Mindanao in search of the treasure, just as men had gone looking for El Dorado. Major General John Singlaub, a founder of the CIA and the o#cer who headed intelligence operations in China during the war in Manchuria, had led one such expedition. According to Nichols, many men had been murdered trying to retrieve Yamashita’s gold. But the descendants of Chiang Kai-shek were in possession of one of the boxes containing the Fed bonds. Nichols said he could broker the return of the bonds to the United States in return for a percentage of the face value.

  As long as they remained unaccounted for, the bonds represented a dire strategic threat to America. The southern Philippines was largely Muslim, and it had become a base of operations for Al Qaeda.

  “Bob showed me photographs of the boxes containing the Federal Reserve certi!cates,” Sam recalled. “There was a picture of a rusty old briefcase with the seal of the Fed on the front. It was one of twenty-!ve boxes that all !t together into the motherbox. There were photographs of Oriental men standing around a table—the emissaries of the family of Chiang Kai-shek. There was a picture of a canister that contained a deadly nerve gas. If the boxes weren’t opened at a forty-!ve-degree angle, the canisters would explode and kill whoever tried to get at the Fed bonds.

  “Those were the real boxes. But Bob said there were many counterfeits in circulation.

  He showed me photographs of the fakes, which were in Samsonite suitcases. He explained how to tell the di"erence between the real ones and the phony ones. Bob said he thought we could put a deal together to bring all of the bonds back to the United States. He could lead a mission to retrieve Yamashita’s gold.”

  More than $700 billion in bonds had been issued. Nichols said that if the Fed paid even a fraction of the true value of the bonds it would amount to tens of millions.

  Nichols told Sam he’d $own to Singapore to meet with a man who represented the family of Chiang Kai-shek. But there was ill will on their side. Past attempts to have the Fed bonds honored hadn’t succeeded, despite the existence of “heritage documents”

  detailing the provenance of the securities and ensuring their authenticity.

  “The Federal Reserve denies the legitimacy of the bonds,” Nichols told Sam. “They say the bonds are counterfeit. They say the Fed never issued the bonds. They mythify them to create plausible deniability. The Fed knows it doesn’t have enough money to pay for the bonds, so it pretends that the bonds were never issued. The only way to repatriate the bonds is to have contacts at the absolute highest level of the United States government. That means the White House. That means the Bush family. They’re at the level to know about the Fed obligations.”

  “The !rst cousin of President Bush is one of my best friends,” Sam said. “His name is John Ellis. He’s tight with the president. I can arrange for you to meet John.”

  “I need to know that Ellis has relationships at the correct level, or else it’s in no one’s interests to pursue this,” Nichols said. “Not for you, not for the Chinese, not for me.”

  A meeting was arranged. Ellis was indeed as Sam advertised. A graduate of Yale and Harvard, Ellis belonged to the tiny ultraelite Bush clan, and he looked the part: tall, with a strong jaw, light brown hair, and the sturdy build of a former hockey player.

  Ellis was close with major !gures in the White House. To convey a measure of Ellis’s power, Sam told Nichols that Ellis had been a political analyst for Fox the night of the 2000 election. When the result in Florida seemed too close to call, Ellis had been the !rst commentator to say that his cousin George W. Bush had won. Viewers weren’t informed that Ellis was Bush’s !rst cousin and close personal friend. Ellis’s call had created a tide of momentum that had never been reversed. Sam grinned as he claimed that Ellis had personally delivered the presidency to Bush. How was that for pull inside the White House?

  When Ellis arrived at Sam’s house, he was surprised to greet Nichols, who he found was an overweight, pu"y-faced chain-smoker with no evident energy or enthusiasm.

  Beforehand, Sam had boasted about Nichols’s swashbuckling adventures for the CIA.

  But Nichols looked depressed and physically unwell, not a real-life James Bond as Sam had intimated. As they were introduced, Bob and Ellen Nichols told Ellis they were born-again Christians—not simply religious but deeply faithful evangelicals. Evidently they believed their faith would impress Ellis—and make him trust their word.

  Chinese food was ordered. Like his presidential cousin, Ellis was a teetotaler. He drank Diet Coke, while Nichols began his nightly ritual of downing massive amounts of scotch. The conversation was led by Nichols. Sam hung on Nichols’s every word. It was evident to Ellis that Sam was extre
mely enamored of Nichols—infatuated even. Ellis listened silently, warily, as Nichols described the shadow market and the incredible returns that could be made trading the secret Fed bonds. Nichols explained the classi!ed nature of the “business with no name.” It seemed highly improbable to Ellis that Sam and his dissipated companion had somehow managed to outwit the likes of Goldman Sachs and Salomon Brothers.

  Nichols then handed Ellis a three-page memorandum titled “The Pakistan Problem.”

  Evil forces were conspiring against President Bush, Nichols said. Radical Islamists were plotting to ensure that Bush would not be reelected. But Nichols said he knew how to change the political landscape and ensure that Ellis’s cousin triumphed in the 2004

  election. Nichols could win the presidency and save America all at once. Capturing Osama bin Laden was the key. Nichols lowered his voice and said that he knew how to find bin Laden.

  As Nichols lit a cigarette, Ellis wondered if this was a prank. Was there a hidden camera somewhere? Sam had the eager look of a teenage boy. The notion that a half-drunk man sitting in a mansion in Westchester sipping a Jameson’s on the rocks could locate the world’s most wanted man—Ellis didn’t know where to begin.

  Nichols explained the details. The Pakistani government was run by a small group of generals known as the Corps Command. There were twelve generals in this group. Nine could be bribed. The other three were very anti-American but could be controlled, for the right price. Nichols said a Swiss trust fund he ran could be used to secretly funnel money from the U.S. government to the Pakistani generals. The money would be used to build a water puri!cation plant on the outskirts of Karachi. The plant would be run for the bene!t of the generals—but also the Pakistani people. In return, the Corps Commanders would reveal the whereabouts of bin Laden. The Al Qaeda leader wasn’t hiding in the mountains of Waziristan, as many suspected. He lived in comfort under the care and protection of the Pakistani military. Nichols didn’t know his exact location yet. But once the covert cash was transferred to Nichols’s Swiss account and then onward to the generals, bin Laden could be hit by a drone missile attack, or a Special Forces raid on his hideout. Nichols was claiming he could change world history and kill the most wanted outlaw of all time. It all seemed ludicrous to Ellis.