Octopus

by Guy Lawson

  But then something very strange happened—or didn’t happen. Nichols didn’t vanish.

  Sam wasn’t given the slip. There was no blow-o%. Nichols remained Sam’s constant companion and handler in London. He appeared to anticipate the trades in Germany just as much as Sam. It seemed that Nichols wasn’t content with a score of $10 million —not with more than $100 million still on the table. No self-respecting inside man could exit the stage with the Babbitt holding on to such a sum.

  The two men completed each other. It was as if they were each convincing the other that their fraud was real. In Nichols’s eyes, Sam really was the wizard of Wall Street.

  Likewise, under the gaze of Sam Israel, Nichols was a covert operator who’d been the inspiration for The Bourne Identity. In their twisted way they’d become true friends.

  Both were fakes who found authenticity in the other. Both were playing a game of make-believe that best resembled a Russian Matryoshka doll, with each delusion containing another delusion inside the next delusion.

  * During three years of reporting, Israel repeatedly said he was holding back one part of his story. His reluctance to reveal this #nal element of his tale came from fear of being further prosecuted, he said. When I related Israel’s account of the murder to the FBI, it was met with extreme doubt. There was no body, no investigation, nothing to confirm Sam’s claim to be a killer—thus no way to charge Israel with murder.

  † The tale about Greer has circulated for decades, despite the obvious fact that none of the hundreds of witnesses saw him draw his weapon and shoot. Common sense raises the question of why an assassin would take the risk of #ring from the front seat of the car in the motorcade in plain sight. Even among ardent conspiracy theorists, the Greer explanation is widely seen as baseless.

  CHAPTER FIFTEEN

  Deliverance

  The mechanics of the secret bond market had never been entirely clear to Sam—or to Nichols. The obvious reason was that the entire market was a concoction. But the fraud was enabled by the mysterious nature of postmodern capitalism. New !nancial instruments were being created all the time on Wall Street, “structured products” that were traded by banks in “private placements.” One of Bayou’s major investors, Deutsche Bank, was involved in a bet that exempli!ed how wispy and abstract trading could get.

  To Sam’s delight, the bank had invested $32 million in Bayou purely as a hedge against an insanely arcane investment it had made in a security created to enable bets on a basket of hedge funds—one of which was Bayou. The Deutsche position in the basket of hedge funds didn’t involve putting money into any actual funds. The security was “synthetic,” in the language of Wall Street, like collateral debt obligations and other derivatives that had become a multi-trillion-dollar market. It was a bet on a bet, which the bank had decided to hedge by actually investing in Bayou.

  The mind-bending complexity of Wall Street enabled "im"am artists in the shadow market to talk mumbo jumbo and appear to be making sense. Perversely, it was the correlative of what Sam did with Forward Propagation at Bayou. Sam’s trading program didn’t actually work—at least in the way Sam claimed. But he could talk about it as if it did. The same logic applied to Postbank. Thus Golo Barthe could call Sam and say that an $18 billion letter of credit had been issued by a bank in the Netherlands. The transaction was secured by Israel’s 100 million euros. Barthe told Sam to contact Postbank’s bond traders in Liechtenstein—the tranches had been traded there. Sam immediately phoned the principality. The conversation was conducted in broken English and slightly confusing, but it was clear that the man was saying that the trade had indeed gone through. Two tranches. The pro!t was $300 million—and that was only the start. It was happening, at long last. Sam and Bob Nichols began to plan to celebrate that evening. But Sam didn’t let his excitement go too far, not this time, not after his earlier disappointments. He wanted to con!rm the trades and get the money in hand first.

  “I called Postbank to arrange to get the money wired to my account,” Israel said. “But they denied the trade had ever happened. Postbank said the trade had never taken place. They said that the guy in Liechtenstein had never told me that he made the trade. They said he didn’t speak English well enough. They pretended that they didn’t even know what kind of trade I was talking about. I went apeshit. It was all a lie.

  They’d made the trade and they had made a lot of money and they were trying to keep it.“I "ew from London to Hamburg that day. I met with two of the top dogs at Postbank. Bob and Ellen came with me. Things had gone up way higher than Golo by that point. I insisted on a translator and stenographer being present. They told us that Golo Barthe was just a regional retail sales guy for Postbank—which was obviously not true. I told them that I was going to go to Der Spiegel with the story. I said I had a tape recording of my conversation with the trader in Liechtenstein and I would release it to the press. Postbank had just gone public and now it was cheating me out of $100

  million? A German bank was defrauding a trader named Israel? How was that going to look? I said that I knew they were trying to boost their balance sheet. They tried to bully me—to get me to back down. But I put on a masterful performance.”

  Postbank said it would consider how to deal with the situation. As the trio left the meeting, Bob Nichols embraced Sam with delight. “Your professionalism was incredible,” he said.

  “You’re the most dangerous man we’ve ever met,” Ellen Nichols added. “With the possible exception of ‘Double Deuce’—the great English spy.”

  Sam was "oating on air. That night they all went out to dinner with Barthe. The deceptions of the senior executives were deplored. Treachery in the shadow market was rampant, Bob said. Derek Mirsky, the young rakish trader, was going to trade MTNs the following day in Frankfurt, Barthe reported. Nichols gave Barthe a grim warning to pass along to Mirsky: If he screwed around he’d be in deep, deep trouble. Ordering rounds of scotch on the rocks—Sam stuck to wine—Barthe and Nichols both got wildly drunk.

  Outside in the parking lot, Barthe smashed his car into another car and they all ran into the night laughing. Life was a lark again. Sam was on his way back to the top.

  The next morning Sam went to Postbank to withdraw a few thousand euros from Bayou’s account for walking-around money. The bank clerk entered Bayou’s name in the computer and found the account—but no money in it. One hundred million euros were gone; all of it had been withdrawn. The clerk panicked. Bayou Funds LLC’s “nondepletion” account was depleted in the extreme. Sam’s signature was supposed to be required for any withdrawal. But he had also signed a power-of-attorney agreement giving Mirsky power to give “irrevocable” instructions to Postbank. The power of attorney had evidently fooled a clerk.

  Ten horrifying minutes later, the money was found in the account of Polaris Inc.—the company Mirsky controlled. It was very nearly a bank heist of staggering proportions.

  John Dillinger could only dream about scoring more than $100 million. By pure "uke Sam had stumbled into the plot before Mirsky had made good his getaway. Postbank immediately froze the Polaris account and the German police were noti!ed. By then, Mirsky had vanished.

  When Sam was called in for an “interview” with the German police, he decided to bring a lawyer. A thick !le with George Katcharian’s name on it was placed on the table by two German detectives and a government bank regulator. Katcharian was the London specialist in the shadow market whom Nichols had introduced to Sam.

  Katcharian had led Sam to a daisy chain of joker brokers, each more crooked than the last. But Sam did not reach the obvious conclusion.

  “I told the German police the truth to a degree,” Sam said. “I said I was there to do some bond trading. But I didn’t specify the programs. I was trying to be helpful without revealing that I’d signed secrecy agreements not to tell. They said Katcharian was a very dubious character. The same for Mirsky. Those two were de!nitely people of interest to the German police.”

  The po
ssibility of trading had been stopped cold by Mirsky’s attempted theft. Despite repeated pleas from Sam and his German lawyers, Postbank kept the money in Bayou’s account frozen. To the Germans Sam wasn’t a potential victim—he was a suspect.

  Money laundering was one of the most complex crimes to recognize. Legitimate and illegitimate businesses commingled in ways designed to bewilder banks. Postbank could be liable if it allowed the money to be transferred when Israel was surrounded by such dubious !gures. Until the suspicions of fraud were fully resolved, Bayou’s money was trapped.

  Sam called Marino in Connecticut to explain what had happened. He told Marino that he was going to “take care” of Mirsky. Since the staged homicide in Hamburg, Israel had begun to imagine himself as a killer—as both a matter of remorse and a source of pride. Sam told Marino that Nichols had made “arrangements.” Sam said Mirsky had been jumped and beaten up and left for dead. It wasn’t true. But Sam wanted Marino to think he had taken action. He also wanted Marino to know what happened to people who double-crossed him.

  “For all I know he’s dead in the gutter, that motherfucker,” said Sam.

  Marino was duly intimidated—and frightened. The longer Sam was with Nichols, the more it seemed to Marino that Israel was capable of real violence. “After that call I was expecting the FBI to come knocking on Bayou’s door any day,” Marino recalled. “But they never came to Bayou. They never asked to talk to the chief financial officer—me. It makes you wonder.”

  SAM HAD TO GET BACK to New York. He had to keep Marino in line. He also had to keep up appearances for Bayou’s employees. He left his German lawyer in charge of e#orts to get the money in Postbank unfrozen and "ew home. One of Bayou’s largest investors had demanded a meeting. Consulting Services Group of Memphis had more than $30 million in the fund. Years earlier, Sam had hired the son of a CSG executive to work on the trading "oor, believing it was part of a quid pro quo for getting more of CSG’s money. The unspoken arrangement had worked, as far as Sam was concerned.

  But the son had suddenly resigned. Marino suspected the son had witnessed something that tipped him o# about the fraud. Marino’s dread was seemingly con!rmed when Lee Giovanetti of CSG called and said he wanted to inspect Bayou’s records; he had doubts about how the fund was being run.

  Sam had no choice but to agree to the sit-down. But Marino made sure Sam wasn’t in the o$ce when Giovanetti and his team actually arrived. Left on his own, Marino showed Giovanetti into the conference room. When Giovanetti demanded to see Bayou’s internal !nancial statements, Marino said no. The records were con!dential. He could look at the audit, Marino said, like any other investor. Tempers "ared when Giovanetti cast doubts on Bayou’s “operational procedures.” Then the subject of Richmond-Fair!eld was raised. This was too much for Marino. Leaping to his feet in fury, Marino screamed that he was outraged, outraged, by the slander implied in the question.

  The CSG team departed. A sternly worded letter from Giovanetti arrived the next day, declaring that CSG was redeeming its entire investment. Sam’s reply a#ected indignation. “The meeting was a scripted, farcical attempt to get us to jump through onerous hoops in order to justify taking your client’s money out of Bayou,” Sam wrote.

  Sam said he resented the personal criticism from an erstwhile friend. “I have been taken advantage of by many ‘friends’ because of my trading abilities,” Sam wrote. “Our motto is very simple: ‘If you don’t believe, you’re free to leave.’ ”

  DAYS LATER, Sam was dressed in a pair of sweatpants and a T-shirt when he answered a knock on his front door. FBI Special Agent Carl Catauro and Financial Investigator Kevin Walsh introduced themselves and explained that they were concerned that Bayou had been the target of an attempted fraud in Germany. Sam invited the agents in. He assured them that transactions involving Postbank had been the result of an unfortunate misunderstanding. It was being sorted out by lawyers in Germany.

  To the FBI agents, Israel appeared composed, but also slightly manic. Then Sam started to tell a story that stopped the agents in their tracks. He said that he was trading in a secret bond market in Europe. The money in Postbank was in a “nondepletion account” that enabled the money to collateralize trades in securities in the secret market. Other funds would “ping” o# the Postbank money. There was no risk. The returns were amazing, Sam grinned—billions and billions. The FBI o$cials looked interested—then concerned. Sam assured them it wasn’t a fraud.

  Catauro and Walsh exchanged glances. Sam o#ered the FBI agents a tour of the house and the chapel, proudly showing them his collection of reptiles. He took them up to the music studio in the chapel’s loft and bragged that it was where he jammed with the Allman Brothers. He said he was going to throw a party the next time the band was in New York. Lying down on the couch in the chapel, wincing from back pain, Sam assured the two FBI officials that they’d be invited.

  The agents didn’t pretend to be experts on international commerce—certainly not compared to a big-time hedge fund trader like Israel. But the tale about the shadow market didn’t add up. They said they were concerned he was being duped. Sam con!dently replied that he knew what he was doing. He told them about Robert Booth Nichols and how the bond market !nanced CIA covert activities. Sam said that part of the proceeds was used for charitable purposes. He told them about the American Academy for Excellence and all the good works he was going to do. He was so convinced he began to convince the FBI investigators. Was it possible that such a market existed? Was Sam trying to abscond with Bayou’s money? If it was real—if Israel knew more than they did—why had they never heard of the trading programs before?

  “Only the upper levels of people in the government know about the existence of the market,” Sam said. “Regular FBI agents don’t know about the programs because you aren’t high enough.”

  Sam lit a cigarette—a habit that had grown since he had fallen under the sway of the chain-smoking Nichols. “All of this has to be o# the record,” Sam said. “If word of the market got out it could destabilize the American economy. It would rock the !nancial world.”

  Catauro and Walsh left the Trump mansion in a daze. “What the fuck was that?”

  Catauro said as they walked across the circular driveway in the shadow of the Eros fountain. “Can this thing exist?”

  “I have no idea,” Walsh said, shaking his head.

  In the following weeks, Catauro and Walsh visited Sam a number of times. Walsh began to take a special interest in the case and Sam’s tales. He looked up Nichols and The Last Circle online. Was there really such a thing as the Octopus? Had Danny Casolaro been murdered? Had Sam really glimpsed an alternative reality? Like everyone who came into contact with Sam, the two investigators were disarmed by Sam’s sense of humor and self-deprecating friendliness.

  But their boss, Special Agent in Charge Steven Gar!nkel, wasn’t satis!ed that Israel had been su$ciently warned. In fact, Gar!nkel was absolutely certain that Israel was either caught up in a fraud or perpetrating one. A con!dential FBI background report described Robert Booth Nichols as an “international con man.” It was evident that Sam didn’t know the nature of the person he was dealing with. Gar!nkel decided to accompany Catauro and Walsh on their next visit. Like his colleagues, Gar!nkel was amazed by the opulence of Sam’s house. The three FBI agents found Sam upstairs in the master bedroom. As usual, Sam was happy to see them. He suggested they step outside on the patio o# the bedroom so he could smoke a cigarette. To Gar!nkel it seemed that Sam was displaying no anxiety or uncertainty when he should have been extremely concerned. Garfinkel got straight to the point.

  “Sam, you’re getting ripped o#,” Gar!nkel said. “I don’t know exactly how or by who, but it’s guaranteed you’re being defrauded.”

  “You’re not ranked high enough to know what’s going on,” Sam said.

  “If there is a shadow market, diagram it for me,” Gar!nkel said. He handed Sam a pad of paper. “Show me how it works.”

  Sam took u
p a pen and started to draw squares placing the Federal Reserve and the “prime banks” who traded in the shadow market on a grid. The explanation for how the American government funded the black ops of the CIA sounded absurd to Gar!nkel. But the language Sam used to describe the transaction was familiar. Nondisclosure, high-yield, ready, willing, and able—Gar!nkel recognized it as the language of fraud. He

  looked Sam in the eye and said as directly as he could that he was absolutely positive someone was trying to steal from him. Sam would have none of it. He told them that he was going back to Germany in a few days to get his money unfrozen. The FBI could come with him. They would see that the shadow market was real.

  Gar!nkel was exasperated. Robert Booth Nichols was a con man, Gar!nkel stated, as if it were a matter of fact. Sam had told them about the $10 million he’d “lent” Nichols.

  But when Gar!nkel asked if it was a consulting fee, or protection money, Sam was evasive. As the conversation progressed, Sam became less vehement in his certainty. It seemed to Garfinkel that Israel was contemplating the possibility that the lead FBI agent might be right. Israel said that Nichols had become a close personal friend. He was like a member of Sam’s family—he was “Uncle Bob” to his son. Gar!nkel thought Sam’s expression betrayed the dawning fear that the FBI was telling him the truth.

  “Nichols is full of shit,” Gar!nkel said. “He’s no assassin. You’ve been reading too many books.”

  Sam’s shoulders slumped. He lit another cigarette.

  “Sam was trying to come o# as a big-time !nancier,” Gar!nkel recalled. “But he couldn’t pull it o#. He couldn’t explain how the deal worked. His diagram was nonsense. But it was also true that 99 percent of the people on Wall Street couldn’t explain how derivatives worked, and that was a trillion-dollar industry. I thought he was a moron. Kevin and Carl were nice to him. I wasn’t. I told him he was a fucking idiot.”