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Book Excerpt: 'Octopus,' by Guy Lawson

In an excerpt from his new book, Octopus, Guy Lawson explains how a hedge fund fraudster cooked the books
"The 'trick,' if that's what you call it, was really an exercise in misdirection," says Marino
"The 'trick,' if that's what you call it, was really an exercise in misdirection," says MarinoIllustration by Kelsey Dake

By the time the Bayou Hedge Fund imploded in 2005, it had grown to $450 million—or so its investors were led to believe. Effectively, the fund was a Ponzi scheme. Bayou’s chief executive officer, Samuel Israel III, was later sentenced to 20 years in jail for orchestrating one of the most unbelievable frauds in Wall Street history, plus two years for faking his suicide. Over the course of countless interviews I conducted with Israel and his chief financial officer, Dan Marino, who is also serving 20 years, Marino revealed how the fraud worked on a day-to-day level. The pair founded Bayou as a legitimate hedge fund in 1996. In its first year, however, it suffered a net loss of $161,417. The fund had less than $1 million invested. A string of bad trades and bad luck meant that Bayou had a negative performance of 14 percent in a year that marked the onset of a historic bull market. The reputable firm of Grant Thornton had been hired to do the fund’s first-ever audit. As soon as the results were released, Marino and Israel knew, Bayou would be dead—and they had staked everything on succeeding this time.

Israel was the scion of one of the most successful commodity trading families in the country. After going bust three times as a trader, he had vowed never to go broke again, no matter what. Dan Marino confronted an even bleaker reality. The socially awkward, heavyset 37-year-old accountant had a hearing disability, thick glasses, and a pronounced lisp, and still lived at home with his mother on Staten Island. If Bayou went out of business, Marino would be fortunate to eke out his days doing taxes in a strip mall.