by Guy Lawson
Then there was the gold mine in Arizona.
“The mine was supposed to be worth $152 billion,” Holmes recalled. “It was obviously a ridiculous amount of money. I was in Arizona, so I went out and looked at the location of the gold mine. It was $at desert scrub, creosote bush, palo verde trees, a few saguaro cactuses. It happened that my father was a geologist, so I knew that there was no chance gold was going to be found there. It was geologically impossible—the area was an alluvial plain.”
Holmes didn’t know precisely what was going on and it didn’t much matter. The Arizona gold mine fraud was enough for him to exercise his jurisdiction. He had no idea who rightfully owned the money. He only knew that there wasn’t $152 billion in gold hidden under the desert and that if he didn’t act quickly someone somewhere was going to lose $100 million.
ON THE VERY SAME June morning that Kip Holmes issued a warrant freezing the money in Majestic’s account, Lew Malouf called Sam in New York. Malouf said that the trading had commenced. The money in the account in New Jersey was “rolling.”
Bayou’s $100 million had been “$ipped” a couple of times. The big payo# was coming within hours. Sam didn’t know how to take the news. Like a prize"ghter on the losing side of a "fteen-round slugfest, he was battered, bruised, blinded. He was throwing haymakers, hoping to get lucky, hoping to land one big blow and save the day. Was this the miracle comeback? Was this salvation? Was Sam’s entire insane voyage going to end with one of the greatest trades of all time?
Dan Marino was eating breakfast at a cafe in Connecticut when Bayou’s o!ce manager called. The o!ce manager frantically urged Marino to contact Wachovia.
Bayou’s money had been frozen.
“I have bad news,” the Wachovia o!cial said when Marino called. “We have received a warrant instructing us to seize all the assets in the accounts of Majestic Capital.”
He o#ered no further information. Nor could he legally. Holmes’s warrant was issued under seal. Who had seized Bayou’s money? Why? In a panic, Marino rushed for his car, calling Sam on his cell. Sam was stunned. It was impossible, Sam said over and over as if trying to convince himself. He called Wachovia and discovered it was true—the funds were frozen. What faction was behind the Arizona lawman? Sam wondered. Bob? The Russians? The CIA?
“Dude, the money is fucking frozen,” Sam said when he got Malouf on the phone. “It can’t be trading.”
“That’s not true,” Malouf replied. “We’re getting paid today.”
Sam exhaled heavily. The money was frozen, Sam said. Malouf told Sam he would check and call him back. Sam’s cell rang a minute later.
“We’ve been penetrated,” Malouf said.
Malouf didn’t specify who’d penetrated the transaction, or why. Sam wasn’t listening anymore anyway. While Malouf faked fury, declaring that the government had acted illegally and he was going to sue, Sam knew he was talking nonsense.
“Lew Malouf—now that guy was a fraud,” Sam said, sighing in recollection.
“Part of me thought the program was going to work right up to the second I got the call saying the money had been frozen. When I found that out I knew I had a serious problem. I felt awful. I tried to focus on trying to get the money, but I was crushed, devastated, remorseful—and mostly disappointed in myself. I’d let down everyone who’d trusted me and loved me. I’d always been the underdog who exceeded expectations. At least that was how I thought of myself. I didn’t want to fail.”
IN NEARLY A DECADE, the charade of Bayou Funds had transformed from accounting trickery to true-crime thriller to tragedy to parody. Now Sam was confronted by the absolute certainty that the Problem was going to be revealed any day. Instead of crawling into a corner and waiting in dread for the knock on the door, Sam played for time. Using the only skill he had left, Sam went on the grift. He was no longer the whale with $100 million. Sam was a street-level con man, like the dozens he’d encountered on his magical mystery tour. The sophisticated fraud of Bayou was replaced with “419 scams”—so named because of the section of the Nigerian criminal code devoted to obtaining property through false pretenses. Sam’s conduit this time was a lawyer in L.A. named Jan Heger who specialized in “alternative” investment strategies.
“I called Heger and told him I was in trouble,” Sam recalled. “I needed to make one hundred million right away, plus another hundred million on top of that.”
Heger said he happened to have billions of dollars’ worth of deals sitting on his desk at that very moment—like $100 million in cash and $20 million in rubies that belonged to the president of Ghana and could be purchased for a small up-front “commission.”
Sam believed Heger. Initially. A little. At least he tried to. Heger seemed to know what he was talking about—in Sam’s exhausted and conspiracy theory–addled mind.
To get going, Sam wired $300,000 to Heger. At the lawyer’s direction, Sam went to the airport in New York to greet a flight from Ghana with the rubies aboard.
“The eagle has landed,” Sam told Marino from the airport.
“Really?” Marino asked, incredulously.
“Come to my house tomorrow and we’ll go over the details,” Sam said.
“I went to bed hoping that it was a godsend,” Marino recalled. “The next day I saw Sam at his house. He was upstairs in his bed, like always. No one else was around. He was extremely nervous even though he was trying to appear in control. He told me that the shipping manifest had been incorrect so customs wouldn’t let the package into the country. He said the shipment had gone on to Montreal. I didn’t care anymore. I don’t know if Sam was simply lying or if he’d constructed a fantasy world in his head that was so disconnected from reality he couldn’t tell the di#erence. By the end I "gured he was trying to steal the hundred million for himself and leave me holding the bag.”
But Marino was wrong about Israel. Sam never considered running away. Nor did he think about stealing Bayou’s money. He could have disappeared many times, taking along as much of Bayou’s money as he wanted. He had had more than enough opportunity to purloin a huge amount of money and vanish. The wonder was that he didn’t do precisely that, at least as a contingency plan. As the noose had tightened around Sam’s neck, it seemed as if the only sane response would have been to transfer a goodly sum—say $10 million—to a Swiss account. With a little planning, Sam would have had an excellent head start on the law. He could have settled down in a hacienda in Costa Rica. Or Phuket. Or Cape Town, a destination favored by high-end fugitives like Barry McNeil because of the pleasant climate and proximity to Mozambique, where a man on the lam could acquire a new identity and a passport on short notice.
Instead Sam kept up the "ght, or what now passed for it. Heger’s deal $ow turned into a torrent. One day he o#ered Sam $40 million in gold for a mere $40,000 up front.
Eighteen thousand dollars in “duties” would fetch Ghanian jewels with a value of $40
million. Two and a half billion dollars’ worth of bonds held in boxes entitled “President 12” could be had for just over "ve grand. In a matter of weeks, Sam’s $300,000 was gone. Heger e-mailed Sam to say he needed more money. “To spend $1 million to obtain $100 million is a small price to pay,” Heger wrote. “I realize we do not have this kind of budget, but if we did I believe there would be no doubt that we could go to at least $2 billion.”
THERE WAS NO LONGER enough money for Bayou to function. The folly of the shadow market had been complemented by Marino’s venture capital misadventures.
The result was not enough cash $ow to run the business, let alone maintain the fraud.
Sam e-mailed Bob Nichols to demand the return of the $10 million loan. Nichols ignored him. Lying naked in his bed in the Trump house watching SpongeBob SquarePants, Sam con"ded to one of Bayou’s employees that he was going through a liquidity crisis. The divorce had depleted his funds, Sam said. The employee was friends with a highly regarded Wall Street trader named Steven Starker. Sam knew Starker slightly from his son�
�s Little League baseball teams.
Starker agreed to see Sam. He knew Sam’s reputation as a trader and admired the way he had remained involved in his son’s sports despite running a successful hedge fund. Sam told Starker he needed a short-term loan. Sam threw out the number of $3
million. Israel seemed calm, in control. Starker wired the money from his Goldman Sachs account the same day.
A few more weeks had been bought—but at the price of soul-sucking deceit. Marino stopped paying rent on the boathouse. Accounts payable went unpaid. The signs of a business on the verge of collapse were growing more obvious when Eric Dillon of Silver Creek Holdings called Sam to ask about Bayou’s auditor and rumors circulating that Bayou might be “liquidated,” the industry term for a hedge fund paying back its investors and going out of business. Sam told Dillon that there was no truth to the reports. Silver Creek had more than $50 million in Bayou. Trying to put Dillon at ease about Bayou’s books, Sam said that Bayou would change auditors next year to a large and well-known "rm. The ruse didn’t work. On July 12, Dillon sent a letter giving "fteen days’ notice for the withdrawal of all its money in Bayou. Sam called Dillon and flew into a rage. How dare he imply Bayou was anything less than 100 percent honest!
By the next day Sam had calmed down—and realized that he needed to buy time. He knew the power of reverse psychology. He called Dillon and apologized for his outburst.
Instead of following the terms of Bayou’s agreement, which gave Bayou thirty days, Sam said he’d accelerate the redemption schedule. Silver Creek could have its money back on August 1. It was a head fake. Dillon went for it—or so it seemed. But this time Sam was being played: Dillon hadn’t been assuaged. He was planning on traveling to Bayou’s headquarters to find out what was going on.
The choices confronting Israel and Marino had narrowed to three: disappear, turn themselves in, or announce that they were shutting the fund down. If they went out of business, under Bayou’s partnership agreement they had another ninety days to undertake an orderly liquidation—time to try to "nd a way to avoid the seemingly inevitable discovery of the Ponzi scheme, time to pray for divine intervention.
“It is with great regret, but with an overwhelming sense of pride and accomplishment in a job done to the best of our abilities, that I announce the closing of the Bayou Family of Funds at the end of July 2005,” Sam wrote to investors. “Upon completion of the final audit, all investors will receive a 100% payout on their investments.”
The explicit reason for closing the fund was that Sam wanted to spend more time with his family. Sam spread the word informally that the divorce had taken a heavy toll on his personal life and he wanted to devote himself to his kids. The response from investors was uniformly supportive. The human price paid by traders like Sam was part of the lore of the business. It was refreshing to hear of a hedge fund trader who was willing to give up the big money. Sam’s ploy was counterintuitive and brilliant.
Israel and Marino let the sta# go. They didn’t have the money to meet payroll.
Employees were told that Sam was going to focus on his European trades and pursue charitable causes with his personal wealth. Marino was going to continue with his “investments.” Bayou’s employees didn’t take the news well. More than $1 million in bonuses had been promised—money that would never be paid out.
The phones at Bayou rang constantly as bewildered investors tried to "nd out what was going on. There was no one there to answer. Israel’s short-term loan from Starker came due. Sam ducked his calls. “I hope my credibility hasn’t su#ered too much,” Israel e-mailed to Starker. “But you did me a major favor and I would NEVER screw you—nor anyone else for that matter.” Sam then sent Starker a check for $3.15 million. The check had the character SpongeBob SquarePants on its face. It bounced.
In early August, Sam tried every last-ditch deal that came his way to stave o#
disaster. He attempted to acquire $9 billion in Japanese bonds from an Egyptian con man. Sam was going to “hypothecate” a gold mine for $230 billion—another telltale term for prime bank fraud. Through a string of brokers, Sam proposed using a “real”
painting of David and Goliath by Caravaggio as collateral for an $80 million bond trade. When he was told about $13.5 billion in gold certi"cates issued by the Royal Paci"c Reserve & Central Bank, he jumped on it. The securities were issued by the “prince” of the nation of Caledonia, a secessionist movement in Australia that had purportedly formed its own country—a scheme described by the authorities as “delusional.”
“I am literally out of time now,” Sam wrote to a shadow-market acquaintance as he trolled for more deals. “I am trying everything. Please let me know if any of these projects are valid. I will be available for the next twenty-four hours. Don’t worry about what time you call. Anything you can do will literally save my life.”
August 12, 2005, was a Friday. Marino cut a check to Silver Creek for $53,089,300.
He explained that the check was postdated to Monday—knowing perfectly well there was no money left in the account. On Monday, Eric Dillon of Silver Creek came to Bayou’s o!ce. The check had been turned down because of insu!cient funds. There was no one in the boathouse. The back door was unlocked. Dillon entered and made his way upstairs to Marino’s o!ce, where he found a draft of a suicide note Marino had written revealing the fraud. “I am sorry for the destruction I caused,” Marino’s note said. “I know God will have no mercy on my soul.”
Dillon called the local police, who called the FBI. FBI Special Agent Catauro and his partner Kevin Walsh had been planning to pay a visit to Marino the following day to talk about his relationship with Bayou’s auditor Richmond-Fair"eld. The pair drove to Bayou’s o!ce on Signal Road. As they pulled into the parking lot they were passed by a blue Bentley. They tailed the vehicle, running the plates, and discovered it was Marino.
After a few miles, Marino pulled over. Afraid that Marino might be armed and about to harm himself, Catauro leapt from the car.
“Are you following me?” Marino asked.
“We know what was going on,” Catauro said. “Get out of the car and let’s deal with it.”
DAYS LATER, Sam sat at a conference table in the o!ces of the U.S. attorneys for the Southern District of New York. He was accompanied by his defense lawyers, a crack team paid for by his parents. Gathered around the long conference table were prosecutors and FBI agents. Sam had prepared a letter, which he read aloud.
“My name is Sam Israel and I am a criminal,” he said. “I am a liar and a cheat. I would like to believe that is not what I am, but it is certainly what I have become. The whole time I wanted to make back the money I had lost. I spent a year chasing dreams to do so.”
Israel and his lawyers told the authorities about the box stored in a safe deposit box in the Queen’s Vault in London that contained Federal Reserve bonds worth $100
million. CIA asset Robert Booth Nichols had given it to Israel. He would have opened it long ago, Sam said, but the box was booby-trapped. If it wasn’t opened at precisely a
forty-"ve-degree angle it would explode. A lethal biological agent would be released.
An uneasy silence descended. Was Sam insane? Was he joking? A nervous giggle traveled around the room.
“Don’t you wonder if the Federal Reserve bonds are real?” one of Sam’s attorneys asked the assembled officials. “Doesn’t some part of you wonder if it could be true?”
The FBI in New York contacted its legation in London to retrieve the box. The London police wanted to explode the box and avoid the risk of injury or contamination. But the FBI insisted on gaining possession of the mysterious Fed bonds. So it came to pass that the streets around Piccadilly Circus were sealed by the police. Tra!c came to a halt while the London bomb squad was deployed to defuse the box. Specialists dressed in explosive ordnance suits designed to withstand a chemical weapon attack reached the basement of the Queen’s Vault. The men gingerly removed the contents of Sam’s safe deposit box.
Inside they found a blue shoulder bag. Inside that bag was a laundry bag from the Shangri-La chain of luxury hotels. A heavy box was removed from the laundry bag. The box appeared to be lined with cement. The hasps on the lock were rusted and crimped with age. There was a faded Federal Reserve mark on the front of the briefcase, just as it appeared in the photographs Sam had taken.
The vault was cleared and a bomb-defusing robot was sent in to open the briefcase.
The robot pried open the ancient lock. Click. The seal opened. There was no explosion.
THE BRIEFCASE WAS REPATRIATED to the United States.
The Federal Reserve was called in to inspect the bonds. The quality of the paper seemed authentic; the bonds were composed of the same material Crane & Co. had supplied the Federal Reserve for generations. The coupons for the bonds were payable over thirty years at 4 percent interest, not an unusual structure in 1934. The signature of Treasury secretary Henry Morgenthau was authentic. And it was true: Morgenthau was a close personal friend of FDR who’d been charged with conducting covert economic diplomacy for the United States before World War II. According to leading historians, it was entirely possible that the U.S. government had secretly funded the Chinese government of Chiang Kai-shek in ways that remained classi"ed secrets. After the communists took over China in 1949, there was no sovereign to claim ownership of the bonds. On their face, the bonds appeared to be what Nichols maintained: valid obligations of the Federal Reserve. The debt had been swept away by the sands of history.
But there were oddities. There were grammatical errors, as if the words had been written in pidgin English. There were misspellings as well. The Federal Reserve claimed that they’d never issued bonds—they issued only notes. It was like saying the U.S.