Octopus

by Guy Lawson

  There was no explanation for the bizarre transaction. Who had made the withdrawal?

  Nichols? McNeil? ODL said it was an administrative error. Because it was noticed quickly, ODL had been able to get the money back to Bayou’s account within two days.

  But it was another bad sign: The sharks of London were gnawing on Bayou’s money, only to be ga!ed away at the last moment. It seemed that it was just a matter of time before someone succeeded in stealing all of it.

  The failure of the Soc-Gen trade had been a severe blow to Sam’s morale. Calling from London, Barry McNeil o!ered a variety of reasons for the ongoing failure to "nd the “paper.” There was no paper being issued because it was too early in the year.

  Trading occurred only intermittently. Sam had to be patient. But Sam didn’t want to hear excuses. He wanted action. Bob Nichols had remained in London to ensure that the trades were done. But there was no movement, no sign of progress—at least not that Sam was told about.

  Bayou appeared doomed, but it emerged that the fund still possessed some measure of luck—even if it was dumb luck. When Sam’s trading partner Jimmy Marquez had left Bayou years earlier, the fund had purchased 1 million shares in a clean coal company called KFX. For years, Marquez’s "nal trade had appeared to be just another woebegone reminder of his failure. Then fortune smiled on Israel and Marino.

  “We were at the bottom of the barrel cashwise,” Dan Marino said. “We didn’t have enough money to operate the business and handle the withdrawals. There was the money in London, but Sam insisted that he needed it to make the trade in the secret market. Pretty much the only liquid asset we had was the KFX position. Sam used to ridicule the position because it was Marquez’s trade. But at the beginning of 2005 the stock went way, way up. We sold it all. That day we made "fteen million. It was the largest amount of money Bayou ever made on a trade.”

  The windfall didn’t give Sam hope. It bought some time—maybe six months. But he needed to make ten times that amount to save Bayou—and himself.

  “I knew I didn’t have much time left,” Sam said. “If I wired the money back to New York and gave up, I "gured I could probably stay in business for another year or two just by cheating. But I was getting tired of people fucking with me. I was really on edge. I was never sleeping. I was threatening people. Brutally. I was screaming at everybody. No one was helping. No one was performing.”

  EVENTS IN EUROPE were taking yet another unlikely turn. Alone together in the bars and casinos of London, Bob Nichols and Barry McNeil began to develop their own relationship. Passing the evenings in his usual haunts, Nichols drank heavily and regaled the South African with tales of his career as a covert operator. Along the way, Nichols told McNeil about Yamashita’s gold and the cache of Federal Reserve bonds hidden in caves in the Philippines.* It was the tallest of his tales, normally met with skepticism if not outright disbelief. But McNeil had an astonishing reply. He told Nichols that he knew all about the hidden caves where the Japanese army had stashed the looted riches of China at the end of the Second World War. More than that: McNeil had been inside the caves. He’d seen Yamashita’s gold with his own eyes! This was incredible news. Some of the "ercest Special Forces soldiers ever had gone to the island of Mindanao to hunt for the gold. All to no avail. And yet the pudgy and unprepossessing McNeil had ventured into the mountains and found the treasure? He’d staged an assault on the forti"ed redoubt deep in terrorist-protected jungle? The thought beggared belief. The deed was the ultimate measure of derring-do—the kind of thing Bob Nichols did, or claimed to do.

  But wait: There was even more. McNeil told Nichols not only that he had con"rmed the existence of the treasure with his own eyes but that he was now raising money to launch a mission to reclaim the fabled Fed bonds. McNeil and his team of mercenaries were going to return to the Philippines. This time McNeil was going to stage a raid. He was going to transport the gold bars by charter plane to Lugano, Switzerland. He had an interest in a gold-re"ning facility there where the ingots could be recast and sold for billions. Nichols knew Lugano well. The small mountain city had more banks per capita than any other place on earth; it was a venue of choice for money launderers and tax evaders. McNeil told Nichols that he could invest in the venture—but only if he acted quickly.

  “Barry told me he’d been in the caves as well,” ODL’s Tim Conlan recalled. “He was a conspiracy theorist. Barry believed that thirteen families ran the world. That was the reason the bonds were structured the way they were. He said there really were Federal Reserve bonds hidden in the Philippines. He was going to get them.”

  McNeil seemed to have conjured a level of surreality that outdid string theory.

  Nichols had used the tale of Yamashita’s gold to scam $10 million from Sam. Now McNeil was going to use the exact same yarn on Nichols? What if Nichols actually believed in Yamashita’s gold? What if he believed the tale of the Rape of Nanking and the network of caves "lled with Chinese treasure? What if Nichols was a fraud who was convinced that he’d stumbled onto the real thing? Then there was this possibility: What if the legend was true? What if Yamashita’s gold really did exist? What if there was treasure stored in caves in the jungles of Mindanao?

  Nichols put $1 million into the venture. He didn’t tell Sam of his investment. The delays were straining relations between Israel and Nichols in any event. But the fact that Nichols put a million dollars into Yamashita’s gold appeared to be con"rmation of what Sam had believed all along. Whatever the truth about Nichols was—whether he was a con man, hit man, madman, or all of those things—he evidently believed in the Federal Reserve boxes.

  McNeil wasn’t done with his string of incredible news. He called Sam from London and said he’d found paper to trade—once again, at long last. This time it was a zero bond issued by the French banks Paribas and BNP. The trade was going to be done through ODL. In a zero bond, repayment comes in one lump sum at the end of the term, so it is a structure normally used for extremely safe investments like U.S. Treasury bills and savings bonds. It is also perfect for fraud: Because there are no payments for years, if a fake zero bond was issued it takes a long time for victims to know they’ve been had.

  Sam #ew to London, once again bringing Debra Ryan as his companion. Nichols had warned Sam that the city was teeming with operatives out to thwart them once again.

  When they arrived, it was immediately obvious to Ryan that Sam was still brainwashed by Nichols and his paranoid worldview.

  London was damp, overcast. Ryan went shopping for a winter coat for Israel. The sales clerk at Harrods looked exactly like Sam: husky, balding, pasty-faced. Ryan told the clerk that he resembled her boyfriend and they shared a laugh. He tried on coats for her. When she returned to the hotel and told Sam about the clerk, he was furious. Sam said that someone had come to reception pretending to be her and trying to get into the room. Was the clerk a doppelgänger deployed by one of the rival factions? Sam told Debra that the sales clerk at Harrods could be “part of it.”

  “I asked Sam, ‘Part of what?’ ” Ryan recalled. “What was ‘it’? It gave me a headache just thinking about it. Was he in harm’s way? Was I in harm’s way? I didn’t want to be in the middle of it—whatever it was.”

  On Saturday night the participants in the Paribas/BNP deal met at London’s Ritz casino for dinner. Entering the grand room, Ryan was amazed by the casino’s opulence.

  She was wearing a new designer dress Sam had picked out for her—a metallic silver skirt with matching blouse. Sam was wearing a suit and tie, as were all the other men—Bob Nichols, Barry McNeil, and Graham Wellesley from ODL.

  “Ellen tried to sit next to Sam, but I insisted on sitting beside him,” Ryan recalled.

  “She was still trying to put a wedge between Sam and me. I didn’t know the others. I was trying to "gure the people out—who was manipulative, who had the money, who was in control. Across from me was Katherine Carnegie. Sam was having a great time.

  He talked about putting
on a bene"t concert in China. He was going to get the Allman Brothers and their rock star friends to play. I’m not a big drinker so I was bored. The room was gorgeous—rich jewel tones, gold lea"ng, dark wood. Looking around, I realized that some of the wood in the casino was faux "nished. It was painted so perfectly and magni"cently. The mahogany wasn’t real but it looked amazing. I was blown away. It was fake—but really expensive fake.”

  “It was a fantastically extravagant dinner,” Graham Wellesley recalled. “There was champagne, caviar, like in a James Bond movie. Sam was sucking back lobster. Drinks were free. That was how the casino operated. They only gave you that kind of treatment if you were a big loser, or they were trying to get you to gamble there.

  Normally, a professional hedge fund manager would be a highly quantitative, serious man. The last way he would portray himself would be as a whale in a casino, with lots of booze and money #ying around. A serious hedge fund trader would never go to a place where they get comped. The global hedge fund business is very small and very gossipy.

  “Sam was the impresario. He dominated the conversation. That irked me a little. But he had $120 million in an account at ODL. There was no denying that. But even that was strange. The money had been sitting dormant for more than a month. It was in a money market account, which was basically like a checking account. Usually with that amount of money you try to make it work all the time. Sam didn’t seem to care. I said to them all that I didn’t believe the bonds really existed. They told stories about how they would generate funds for the CIA. They said the CIA used the drug trade to "nance its operations. I listened in disbelief. I kept asking them to show me a real deal—to describe even one transaction that had actually occurred.

  “They couldn’t give me a straight answer. They talked about trying to source bonds. It was about the Mai Wah family or the Philippines or some similar nonsense. There were all these schemes. I told them all that I was going to check out every aspect of any instrument they wanted me to buy. Because if I buy something for a client of ODL and it was wrong, I could be liable.”

  THE BILL FOR DINNER was $8,000. Sam insisted on picking up the tab. The next day, Wellesley decided that passively watching McNeil operate wasn’t enough. The viscount needed to take positive steps to be sure ODL’s clients weren’t ripped o!. When McNeil brought a potential investor to ODL, Wellesley now went to the conference room to warn them. He sat down with the prospects and explained in detail the perils of believing the conspiracy theories involved in the so-called shadow market. Wellesley told them that he’d never, not once, seen such a trade actually happen. He explained that McNeil wasn’t employed by ODL. He didn’t directly say that McNeil was a fraud.

  He had no actual proof, only strong suspicions. But the stern warning given by the senior "gure at ODL had the expected impact. Even the most gullible or reckless couldn’t ignore the viscount.

  “Why are you scaring off clients?” Conlan complained.

  “I’m just telling them that they should have written reassurances,” Wellesley said.

  “They can’t rely on what you say. They need it in writing.”

  Conlan’s shoulders slumped. There was nothing to say: Wellesley was the boss.

  “Okay,” Conlan said, sighing.

  When he was told about Wellesley’s warnings, McNeil was enraged. How dare Wellesley sabotage the trading when they were so close to the end? McNeil had spent months building the business. Between Israel and the other investors, McNeil had $160

  million on deposit in ODL. But it was useless: Wellesley was adamant. Clearly no new money would be put into the shadow market. The #ow of clients turned to a trickle and then stopped altogether. The jig was up. McNeil ceased coming to ODL.

  Sam had no idea what was happening inside ODL. Wellesley had not shared his suspicions with him. Sam had been swept up by a more immediate concern—one that could crush Bayou. He discovered that "nancial disclosure documents sent to investors had contained accounting mistakes. The documents were entirely fraudulent, of course.

  But even in inventing numbers Dan Marino had made an error. It was an idiotic situation, but that was true of so many things related to the Problem. Bayou’s largest investor was Sterling Stamos, a prominent and powerful fund that ran money for the Wilpon family, owner of the New York Mets. Sterling Stamos had initially invested in Bayou to draw down its exposure to Bernard Mado!’s hedge fund. The change in strategy had proved e!ective: Bayou had matched Mado!’s performance, a truly incredible feat that could be explained only by the fact that both were frauds. But CEO

  Peter Stamos was now worried about Marino and Bayou’s back o$ce operations. With $40 million invested in Bayou, Stamos was one investor Sam couldn’t blow o!. If they redeemed, the fund would be in danger of collapsing. Sam #ew back to New York to try to talk to Stamos.

  “Sam told me that it was just a regular annual meeting with the manager of the fund,” Marino said. “He didn’t want me there. He didn’t say why. But I had the sense something was going on. Something felt wrong. So on the day of the meeting I drove to the city myself, without telling Sam, and I met him outside the building and told him that I was going to invite myself in. Sam stopped me from going with threats. He said that if I came in the whole relationship would be blown and I’d be the cause of Bayou’s failure. He made me feel very bad about coming to the city.”

  Israel met with Stamos and his top sta!. Sam said that he was about to raise $2

  billion from European sources. He didn’t specify who’d given the commitment, just that it was “European” money. Stamos wanted to know if Sam could scale up his strategy with that much more capital.

  “I can do it,” Sam said. “All the stocks I trade are very large, very liquid names.

  There’s a tremendous amount of liquidity in the things I trade. I can get in and out of any position within a minute or two.”

  Stamos said he was concerned about Dan Marino and the operations of Bayou, especially given the sudden growth. It was clear that Marino had to be dumped if there was any chance of keeping their money in Bayou. This was a fork in the road for Sam.

  In truth, he would be more than happy to get rid of Marino. In Sam’s view, the overweight and overbearing accountant had become a kind of monster. But Israel couldn’t fire Marino—not without winding up in prison.

  “I told them that I needed to be able to run the business the way I saw "t,” Sam said.

  “I didn’t say outright that I’d get rid of Dan. I told them I would take it under advisement.”

  Marino was pacing outside, desperate to know what had happened. Sam lied and told Marino that his name hadn’t come up at the meeting. “Sam told me that they’d only talked about what to expect for the coming year,” Marino said. “But I could hear the inconsistencies in what he was saying. I knew there was something wrong, but there was nothing I could do about it. It was starting to feel like it was too late to do anything.”

  Within days, Sterling Stamos sent a letter stating they were redeeming more than $40

  million. Bayou didn’t have the money—unless it came out of the $120 million sitting in ODL. Israel and Marino had an epic "ght. The liquidity of the fund was in crisis, Marino said. No money was coming in. Worse, Sterling Stamos wasn’t the only investor redeeming. The whispers about Sam’s stability and Bayou’s strange business practices had grown louder. New investment had slowed, in large part, because Sam was in London for weeks on end. Worst of all, Sam refused to meet with new investors.

  “Once the trades are going we won’t need those investors anymore,” Sam told Marino. “I’m not wasting my time.”

  “If you just meet with them, we’ll stay a#oat until the trade happens,” Marino replied.

  Israel pointed to all the money Marino had drained from Bayou’s co!ers. The companies he’d invested in had multiplied: BMG Golf, Double Triangle, HRsmart, Windtalk, Bio Conversion Technologies. Marino had parted with more than $50 million —more than enough to cover the
redemptions. While both Israel and Marino had indulged their fantasies—Sam as the great trader, Marino as the titan of venture capital —both had crippled the fund.

  Ultimately, Bayou withdrew $20 million from ODL to cover the redemption payment to Sterling Stamos. Sam now had exactly $100 million to make his trade—or, to be precise, $800,000 less, due to an error in calculation. Until then, Marino had rarely been forced to “dip” into Bayou’s funds to pay redeeming members. But they were in a new and dire situation.

  “All through this, we had to keep the sta! happy,” Marino recalled. “Sam wanted to be generous with year-end bonuses, even though we didn’t have the cash and they weren’t doing any work or making any money for the fund. Sam’s view was that he had to pay them well so they would stick around. If they left and started saying things like ‘I didn’t understand how Bayou made money’—well, that would not be good. It was a form of bribery. Sam was a very big proponent of that.”

  Israel and Marino ended virtually every conversation screaming at each other. Israel spent all his time holed up at the Trump house. For years the two men had lived with the threat of mutually assured destruction. Now they were both self-destructing at an alarming rate. Marino’s overeating had made him obese. His health was in free fall because of the stress of running Bayou.

  “I just wanted out,” Marino said. “There were many, many times I debated with myself about simply giving up and walking into the FBI o$ce. I "gured I might get some consideration in my prison sentence if I did that. Once, after a horrible "ght with Sam—in front of all the employees—I drove to Manhattan and sat in my car in front of the United States Attorney’s o$ce. I sat there for two hours staring at the building. I actually walked up to the front door, up to the metal detectors and security guards at the entrance. I was within "ve feet of going in when I turned around. In the end, I didn’t want to go to jail. There was no incentive for me to stop the fraud. I wasn’t con"dent that I’d get a favorable deal from the prosecutors. I thought I had a better chance of solving the Problem and still making money in the process. At least it gave me and Bayou a fighting chance.”