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How Ponzi Schemer Sam Israel Fell for Conspiracy Scam: Review

"Octopus" is written by Guy Lawson. Source: Crown Publishers via Bloomberg

Lying came easy to Sam Israel, the Connecticut hedge-fund manager who faked suicide in 2008 to escape a 20-year prison sentence for running a $450 million Ponzi scheme.

Within two years of starting the Bayou hedge fund in 1996, Israel, trader Jimmy Marquez and chief financial officer Dan Marino began cooking the books to hide a 14 percent loss.

Confessing would have driven investors to withdraw their money, depriving the trio of the chance to show the world that the fund’s Forward Propagation strategy -- a crazy-quilt of technical-sounding palaver and marketing -- worked. Though of course it didn’t.

In “Octopus: Sam Israel, the Secret Market and Wall Street’s Wildest Con,” Guy Lawson tells two tales. One is a diligently researched, lively account of ambition gone bad. The other, in the book’s second half, is a story of the con artist himself getting scammed in what reads like an episode of “The Twilight Zone.”

Israel came from a New Orleans family that owned a commodities trading powerhouse, and wanted to prove that he could make his own financial luck. He worked summers at Frederic J. Graber & Co., a New York brokerage, then dropped out of Tulane University to pursue a Wall Street education.

Late 1970s

The first half of Lawson’s book, which is peppered with extensive interviews with Israel and others, turns a lens on the fast and loose ways of Wall Street starting in the late 1970s.

The financial world, we read in colorful, self-justifying anecdotes from Israel, is a scam. Schemers abound, brokers front-run, or trade ahead of, their clients’ block orders and lying is the way to get by and get ahead.

Against that backdrop, treachery is a matter of degree. Israel is wily, power-hungry, purposeful. He creates an alter ego called Captain Proton for touring Manhattan nightclubs. Boozing, snorting cocaine and womanizing are part of the role, before and after Israel’s marriage. Back surgeries, psychiatric problems and an addiction to painkillers follow.

“I was the swami,” Israel told Lawson in one of many riveting reflections on his wayward role as a financial wizard. “I made the money. I made something out of nothing. I could turn perception into reality.” This from the same man who tells the author he wanted to please people, who knew he was out of control, who wanted to run a “clean” fund.

Enter Nichols

Israel believed his own shtick. He believed he could find a way to crawl out of the hole he’d dug for Bayou. Sure enough, salvation seemed to appear in the form of Robert Booth Nichols, a self-proclaimed ex-CIA agent with alleged ties to the Mafia, Hollywood, Ferdinand Marcos, the Iran-Contra affair. He also professed to know the real story of what happened to JFK in Dallas in 1963.

Nichols tells Israel that a cabal of insiders, nicknamed the Octopus, controls the global purse strings. No big surprise, but this includes a giant secret bond market that the U.S. Federal Reserve doesn’t seem to know about.

Israel, whose deceit and fake returns had led to more asset managers parking their money in Bayou after the implosion of the dot-com bubble, signs on for what turns into Sammy’s Great Adventure as he struggles to make a quick couple hundred million dollars using Nichols’s supposed connections.

The globe-trotting, cloak-and-dagger fantasies and conspiracy theories that overwhelm the size of Israel’s own scam would make “Octopus” an excellent gift for a budding regulatory compliance officer or someone charged with vetting fund managers to make sure their wares are suitable for pension-fund money. Or a shrink, of course.

The basic lesson: Self-delusion is loyal servant to an ego with something to prove and a penchant for the easy way out.

“Octopus” is published by Crown (352 pages, $26). To buy this book in North America, click here.

(Nina Mehta writes for Bloomberg News. The opinions expressed are her own.)

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