Lawson, Octopus

If you like pulp fiction and bizarre conspiracy theories you’ll love Guy Lawson’s Octopus: Sam Israel, the Secret Market, and Wall Street’s Wildest Con (Crown, 2012). The only problem is that the book is not fiction, or at least it purports not to be fiction. The author worked hard not to be conned by all the con artists he interviewed.

Sam Israel III, you may recall, headed the infamous Bayou Hedge Fund. Convicted of securities fraud, and en route to beginning his twenty-year sentence, he drove his GMC Envoy onto Bear Mountain Bridge in upstate New York, wrote “Suicide Is Painless” in the dust on the hood of the vehicle, and went on the lam. Less than a month later he turned himself in to authorities. He is now serving twenty-two years (the extra two for faking his suicide) in the same facility as Bernie Madoff.

Israel came from a wealthy Louisiana family that made its money from commodities trading. Sam, however, didn’t want to go into the family business; he had his eye on Wall Street. His first job was with Freddy Graber who traded his own account, turning a $400,000 stake in the early seventies into $23 million in less than a decade. Graber, it seems, made his fortune in part by being the broker for such firms as Goldman and Lehman and—knowing what the big players were going to do—front-running the market. He also got inside information from a trader who worked for one of the biggest funds in the market. And he was good at painting the tape. What did Sam Israel learn from Graber? “Under Freddy I learned that Wall Street was an illusion. … There were different magicians using different tricks in different ways. But everyone cheated. It shocked me so much in the beginning. I admired those people. And they cheated.”

Sam eventually left Graber (who, by the way, eventually ended up broke) and traded his own money, which followed the familiar, repetitive pattern of building up a nest egg and then losing it all. He tried to set up his own hedge fund that would trade the tape, but he didn’t know how to attract money to his fund. He had to get a job.

Leon Cooperman, who’d left Goldman to start a hedge fund called Omega and was looking for a savvy trader, hired Sam. Sam quickly figured out a way to make a lot of money on the side. Every morning he gave a trader in the Carolinas Omega’s positions for the day, “and he knew how to turn that into money on a big scale, for us at least.” And soon Sam had guys all over the country front-running for him. He had “bags and bags of cash arriving at JFK and La Guardia.”

But Sam wasn’t satisfied. He was tired of working for Cooperman and ready to go out on his own with a computer program—Forward Propagation—that he’d tinkered with for years and believed gave winning signals 86 percent of the time. He founded Bayou and, to complement his scalping, brought Jimmy Marquez on board as a “strong hand” investor.

One misfortune followed the next and, if the fund were not to close, the only solution seemed to be to create a fake audit. The fraud had begun.

Sam “found oblivion in booze and cocaine” as the trading disasters began to mount. But Bayou’s investors got glowing reports and the fund continued to grow. With the events of 9/11, however, “trading out of the hole was no longer a realistic option—unless a miracle occurred.”

Enter the Octopus, a fictitious shadow government allegedly run by U.S. intelligence agencies. “Just as Goldman front-ran the market and created fraudulent derivatives, so did the CIA deal drugs and assassinate President Kennedy.”

The con artist Sam met offered him a way out of Bayou’s financial troubles. “There is a secret government operating within the world’s government,” he explained. “They run the secret trading program—the high-yield market. Only a few chosen people participate in the program. The returns are staggering.”

For a mere $100 million Bayou could participate in this elaborate con, a con so labyrinthine and implausible at every turn that it takes about half the book just to describe it. Only the truly desperate or the mentally impaired could have fallen for it. Sam Israel III by this point was presumably both. The con got conned and Bayou collapsed.

“In nearly a decade, the charade of Bayou Funds had transformed from accounting trickery to true-crime thriller to tragedy to parody.” Lawson recounts it all in this fast-paced though depressing tale of cheating gone delusional.