Octopus

by Guy Lawson

  “Either you’re a victim or we’re going to lock you up,” Garfinkel said.

  ISRAEL WASN’T WILLING to confront the possibility that he was being defrauded. Sam preferred magical thinking and the euphoria of believing deliverance was at hand. He preferred to inhabit a world populated by rival factions and secret bonds, all of it in the grasp of the tentacles of the Octopus. Looking for a$rmation, he started to become more promiscuous in sharing news about the billions he had coming. Sam didn’t talk directly about the shadow market with Bayou’s employees and investors. He hinted, alluded, teased. Bayou was going to have a billion under management by the end of the year, he said. The staff got excited. More money meant bigger bonuses.

  “During this time, Sam was very active, very optimistic,” Dan Marino recalled. “He was running around like a chicken with its head cut o# trying to get the trades done for us—that was how he put it. It was ‘us.’ For the most part, he avoided coming to the o$ce. He said he was too busy. I would go to his house to see him and give him an update on Bayou. But there would be a thousand phone calls and constant interruptions.

  I had reservations about the shadow market. But he would insist that he was getting closer. He said I had to trust him.”

  For sharper investors the notion that Bayou would more than double in size in a matter of months was problematic. Growing too quickly was one of the perils of running money. There was a qualitative di#erence between the skills it took to operate a successful $300 million fund as opposed to a $1 billion fund. Style drift was the industry term for the phenomenon that frequently occurred when a trader suddenly traded much larger amounts.

  “Comments started to !lter back from investors that they were concerned and considering withdrawing,” Marino said. “They felt that Sam couldn’t handle a billion dollars. Then some investors started to withdraw money. Sam’s reaction was indi#erence. He was sure we were going to get the billion. He said, ‘Who cares? Who needs their money?’ ”

  By October redemptions totaled $20 million—in addition to the money CSG had pulled out of Bayou. Marino was able to meet the calls with the money still in Bayou’s co#ers. But the trend was disturbing. Bayou’s sterling reputation was under assault.

  Then a background report by a !nancial research company called Back Track fell into the hands of one of Bayou’s largest investors, Silver Creek. The report contained evidence of Bayou’s regulatory encounters as well as incendiary allegations about the fund by a former employee. Marked “Con!dential, Subject to Protective Order,” the thirteen-page report noted that Sam hadn’t graduated from Tulane—a minor piece of résumé padding but it didn’t inspire trust. A lawsuit for $12,000 in back rent brought by his landlord in the early nineties was unearthed. Sam’s drunk-driving conviction in 2000 was noted, along with his possession of cocaine.

  The report wasn’t conclusive, but it unnerved Silver Creek. Confronted with the report, Israel had to think quickly. There was enough money in Bayou’s accounts to redeem Silver Creek. But the whole scheme was teetering on collapse if Sam wasn’t able to turn around the run of redemptions. On a call with Silver Creek’s Eric Dillon, Sam said the drunk driving was a single mistake—the kind of thing that could happen to anyone. And the NASD regulatory !nding was about small technical matters. Sam waved away the complaints of the former employee, saying he was disgruntled. Silver Creek was convinced by Israel—but it was a close call. Too close for comfort.

  Israel had been back in New York for weeks on end, and there still had been no movement in Europe. Bayou’s millions were still jammed up in Germany. It looked like the shadow market was just that—a shadowlike specter. Sam tried to keep a brave face, but the stress was killing him. He wasn’t physically able to carry on because of pain radiating out from his lumbar spine to his right leg. In October, he underwent a dorsal column simulator trial, followed by the implantation of a device that transmitted high-frequency signals to his spine. Laid up in bed for the following week, Sam discovered that the device made only a small di#erence. The extra-strength fentanyl patches he’d been prescribed were little comfort. Life had become a misery again. With the money frozen in Postbank he was trapped. If only he could get the money released. Then he could make a trade. Everything would be better.

  While Sam convalesced, Nichols called to say he’d found a deal in London through a small brokerage !rm called ODL. Nichols sent a detailed memorandum outlining the trade. Nichols told Sam he’d visited the "oor of ODL and found that it was a real brokerage. The "oor was so chaotic and packed with traders that Nichols had nicknamed it the “snake pit.”

  Everything was contingent on getting the money out of Postbank. Sam had hired a posse of German lawyers and “!nancial consultants” to help him convince the bank to let the money go. But the German bankers were adamant: They had to be completely convinced there was no taint of fraud associated with the transfer before they’d release Bayou’s euros. It was logically impossible. The German police and bankers knew that Sam had associated with George Katcharian and Derek Mirsky—both frauds. Sam pleaded, begged, wheedled. But he was incapacitated, physically and !nancially: stuck in bed, he was unable to make a move in the shadow market.

  Then a miracle happened. For no apparent reason, on October 25, the sum of 90,585,928.54 euros was wired from Postbank to an account in HypoVereinsbank. At the exchange rate of the day, it amounted to $114,943,578.86. Sam rejoiced.

  Incredibly, Postbank had wired $10 million more than it should have. The accounting error was inexplicable—if indeed it was an error. Sam believed the mysterious millions amounted to hush money to keep him quiet about the way the bank had cheated him on the Liechtenstein trade weeks earlier. There was no other way to explain the discrepancy.

  Now that the money had been released, Bob Nichols said the trading !rm ODL was ready to go. But if Sam didn’t come to London immediately he was going to take the ODL opportunity to another client of his. Scared of missing out, Sam decided to brave British Airways’ first-class service to Heathrow. He was ready to roll the dice again.

  CHAPTER SIXTEEN

  The Snake Pit

  During the nineteenth century, harpooned whales were brought to the wharves of Nantucket and Cape Cod, where they were set upon by sharks. So it was upon Sam’s return to London. On his previous trips, he’d met Nichols’s intelligence asset colleagues.

  Now he was introduced to a new circle of shadow marketers Nichols had discovered. It was a society populated by a peculiar mix of the devious, the dangerous, and the deluded—all promising access to a magical land of billions and trillions. One key player was Philip Winsler-Stuart, the head of the Royal Knights of Malta. Aristocratic in bearing, Winsler-Stuart was in his late !fties, thin, tanned, always impeccably dressed in Savile Row suits. A simple computer search would have revealed the many layers of deception surrounding the bogus versions of the real Knights of Malta that had been concocted. These groups were tied to the Freemasons, the Rothschilds, and the pope in Rome, at least according to the more fervid online conspiracy theories.

  Another remarkable individual was the Prince Alessandro di Stromboli, who presented himself as a member of Italian nobility and wore gaudy medals and ribbons on his chest to prove it. His wife, the Principessa Stromboli, was a vision of faux gentility: Overweight, overindulged, overly made up, she was draped in exotic silks and chi"on and talked often about her castle in Italy. Like Nichols’s CIA pedigree, the prince’s claim to such a grand heritage was not proved, but neither was it disproved.

  The prince and the princess let it be known they were deeply involved in charity work —conveniently exactly the kinds of good causes favored by the Octopus.

  James Fairweather was a moneyed gentleman from Zimbabwe who possessed the manners and a"ect of a graduate of one of the best British private schools. Fairweather was accompanied by an attractive American woman named Katherine Carnegie, a member of one of the billionaire families that ran the secret market. Carnegie was tall and willowy, with #owi
ng brown hair and a #irtatious smile. Sam and Carnegie got along famously, trading stories about their illustrious ancestors as Sam hit on her in his goofball manner. Sam fancied she might be interested in him, since she laughed at his jokes and fawned over his tales of derring-do.

  Sam was now supposedly inside the innermost sanctum of high society. But for people involved in transactions that netted pro!ts of billions upon billions, they all had one curious characteristic in common: They were apparently broke. The Knights, the prince, the princess, even Ms. Carnegie—they all needed Sam’s ten-!gure bank account to get into the market. Each was able to facilitate one or another aspect of the transaction, from providing the approved charitable cause to claiming to have contacts who could obtain “freshly cut” or “seasoned” paper. But Sam was the sine qua non: But for his $120 million there would be no deal.

  Barely noticed among Sam’s #amboyant fast friends was a nondescript man named Barry McNeil. The ordinary-looking McNeil didn’t claim any grand lineage or membership in a prestigious organization. He wasn’t a spy or killer. McNeil held himself out as a humble !nancial engineer in the !eld of structured alternative investment strategies. He was the ex-boyfriend of Katherine Carnegie. A South African investment advisor from the city of Pretoria, McNeil spoke Afrikaner-in#ected English. Five-ten, burly, in his late forties, he had sandy hair, a soft chin, and ruddy cheeks—the kind of man who loved rugby and beer. He wore cheap crepe-soled business shoes, and his suits were purchased o" the rack. He looked like a country club bore, not an international finance savant.

  Sam and Nichols convened with McNeil in the lobby of Claridge’s to discuss the multi-billion-dollar high-yield bonds he proposed to trade. Sitting next to McNeil during the pitch was James Fairweather and a man named Tim Conlan. The trio passed over their business cards. All represented themselves to be “introductory brokers” for ODL. In London, it was a term of art—and arti!ce. Introductory brokers were salespeople who brought new business to !nancial !rms. But there were subtleties that weren’t explained to Sam. The only actual employee of ODL was Conlan. Barry McNeil and James Fairweather were not legally associated with ODL in any way. They were freelance operators with the patina of legitimacy that came from possessing a business card. Their relationship with ODL was strictly transactional. If McNeil and Fairweather landed a new client for ODL, like Sam Israel, they’d be paid a commission based on the trading volume generated for the firm.

  “Bob told me McNeil was part of a group inside this small brokerage company called ODL,” Sam recalled. “I asked why McNeil would trade through a little brokerage instead of one of the big players like Goldman Sachs. Bob said that di"erent groups moved around and used lower-pro!le !rms to trade to avoid attention. They made the trades, paid the !rm, and then moved on. It seemed reasonable to me. Bob wanted me to vet McNeil as far as trading went. Bob didn’t understand the ins and outs of trading like I did. I could see that Barry had trading knowledge. He knew his stuff.”

  For all his sad sack anonymity, when McNeil talked about the shadow market he was articulate, persuasive, ingenious. McNeil said that the alternative bond market was unregulated, so he wasn’t able to undertake the transactions directly, even though there were eager buyers and sellers looking to ful!ll the contracts. That was why McNeil had turned to ODL. As a trading company, ODL was regulated by the Bank of England and the Financial Services Authority. As a broker, McNeil “arranged” the transactions, but ODL made the actual trades through Euroclear, the well-known and highly reputable Belgium-based settlement agency that completed trillions of dollars’ worth of trades in bonds, equities, and derivatives. In America, the kind of deal McNeil was promoting was known as a “pink sheet” trade—an over-the-counter deal not registered with the SEC. Sam knew about the over-the-counter market for unregulated securities in the United States. So many trades were made in the OTC market—swaps, options, derivatives—that it dwarfed the stock exchange. Few people knew this fundamental fact of Wall Street: Private side bets were much bigger business than the “market” covered by the cable business channels.

  If Sam acted quickly, McNeil said, he could be the !rst to actually invest in the paper. McNeil said there was no risk to Sam’s capital. The !rst trade would be with Société Générale, a French prime bank. There was to be a “contract’s worth” of $50

  billion of bonds, priced at forty-!ve cents on the dollar. Each $100 million tranche would sell for $45 million. Because the paper was discounted so aggressively, it wouldn’t be di$cult to !nd American pension funds and regional banks in Europe to invest.

  Despite Sam’s impression to the contrary, it was Conlan who’d brought McNeil and his colleagues to ODL in the !rst place. Conlan put a legitimate face on the deal, even if it was an unlikely one. He was in his early forties, with a crooked nose bent by years in the boxing ring. Unlike the poseurs with claims to knighthoods and royalty, Conlan spoke with a Cockney accent. For years he’d been a knockabout broker in London struggling to make a living, with little hope of getting ahead financially Then, in the fall of 2004, McNeil had turned up in London promising to make Conlan rich—!lthy stinking rich. Conlan had met McNeil years earlier, in South Africa. In Conlan’s experience, South African !nancial people were a dubious lot, given to lying and cheating. But when McNeil came calling, Conlan had been unemployed and desperate. Hearing McNeil’s tale of massive pro!ts, Conlan decided to take the project to people he knew at ODL. He told ODL that commissions alone would run to millions of pounds. The proposition sounded dubious—but what if it were true? The risk for ODL

  was minimal; the reward potentially fantastic. Thus had Conlan been hired and business cards furnished to McNeil and his string of brokers.

  “Barry was very impressive as a !nancial engineer,” Tim Conlan recalled. “Maybe not all that plausible, but he made it sound true. According to Barry, the kind of people in this market didn’t trade bonds in the normal market. It wasn’t like normal bond trading, where there are lots of trades all the time. Goldman Sachs and Bear Stearns didn’t trade these bonds. It was a di"erent world. There were barriers to entry. The amount of money was one. It had to be one hundred million dollars to get in. But the biggest barrier was who you knew. To invest, you had to be approved and become part of it.

  “Barry said there were ‘exits’ in place for the !rst issuance—that was the term for buyers for the bonds. ODL was going to provide the platform to settle, clear, and execute the trades. That was what I brought to the table. Barry was going to trade one hundred million two or three times a day until the !fty-billion-dollar facility was drawn down. Even a small fraction of the commission would be a big amount of money. I had a number in my head. I was going to make millions.”

  The psychiatric term for a shared psychosis is folie à deux (a madness shared by two).

  In the case of Sam and Bob, it appeared to take the form of a folie imposée, in that the belief in the myth of the shadow market had been imposed on Sam by the dominant Nichols. But in the shadow-market circles of London it seemed to be a folie à trois, à quatre, à plusieurs (“the madness of three, four, many”). The isolation and self-reinforcing culture of the shadow market acted like a hothouse. The men involved had all reached middle age with the disappointments of failure—Israel as a hedge fund trader, Nichols as a spy, McNeil as a financial wizard, Conlan as a broker.

  “I was extremely excited,” Tim Conlan recalled. “Everyone was. Including everyone at ODL. Sam was a big hedge fund guy from New York. It was the dream ticket. He was an experienced trader with a big fund. Sam had one hundred million in cash. I genuinely thought it was going to work. I believed that Barry believed it was going to happen. Barry was a great theorist. He told Sam it was very di$cult to !nd people with one hundred million who were willing to invest.

  “Nichols didn’t say much. He just watched. He was a big guy, tacky, in a scru"y suit, with dandru". I saw that he was carrying a handgun. I didn’t know what he was supposed to be doing—Sam’s security
, I guessed. I had the strong impression that Nichols was connected to some American intelligence agency. You don’t carry a revolver around London if you don’t have the proper authority. He carried the weapon on the airplane, I was told. So how do you do that if you’re not with the government?

  “It seemed to me like Nichols wanted to be in on everything that Sam did. He was all ears. Sam was his little thing. He didn’t want anyone else getting his attention. He was jealous, protective. If you wanted to deal with Sam, you de!nitely had to go through Nichols. But it was clear that Sam didn’t need a lot of pitching from Barry. Sam believed it to start with.”

  Nichols had good reason to be jealous of Sam’s attention. As news of Israel’s reappearance in London spread, rivals attempted to seduce Israel away from the CIA asset. A self-styled operative from the Israeli intelligence agency, Mossad, promised Sam he’d make billions trading letters of credit. The terms were preposterously complex, involving brokers from Peru, Brazil, and Malta, as well as an “underwriter” from Texas who supposedly pledged $5.8 billion—without a scintilla of proof of the existence of the money.

  Nichols called this pretender “the hat,” a reference to the yarmulke he wore. Nichols said the hat was a fraud, but Sam didn’t listen. He #ew to Amsterdam and Barcelona to try to make the trades. A distinctive pattern emerged, though. Each time Sam left Nichols’s protection, he was attacked or assaulted; his suite in Claridge’s was broken into in the middle of the night, prompting Sam to shoot his Browning 9 mm (with a silencer) at the #eeing !gure. The assault appeared to have been orchestrated by Nichols.

  Israel went into what he called “full James Bond mode.” Nichols convinced Sam that the only way to ensure his safety was to move to the Grosvenor Hotel. It was neutral territory, Nichols said. He also convinced Sam to go to the o$ces of ODL and see for himself that it was real. ODL was located in Salisbury House, an imposing nineteenth-century building on the north side of London Wall. Despite the large marble entrance on the ground #oor, ODL’s trading room on the sixth #oor was small, cramped, shabby.