by Guy Lawson
IN FEBRUARY OF 2004, Sam checked into Beth Israel Hospital for yet another surgery, this time to repair a torn rotator cu! in his shoulder. After the operation, a sling and brace kept his arm at a forty-"ve-degree angle. He convalesced for a few days, but he had a family tradition to attend to. Every year he went to Mardi Gras no matter what.
The Israel family had been prominent participants in the celebration for "ve generations; Sam’s father had been Duke of the Rex, the most prestigious organization at the carnival. Sam chartered a Gulfstream private jet, sparking a confrontation with Marino about his spendthrift ways. Israel said he was going to take a dozen of Bayou’s most important investors with him. Marino didn’t want to go: He was petri"ed of being away from the o$ce for even one day, lest one of Bayou’s employees stumble on evidence revealing the scam.
“My family rented a #oor of the Lafayette Hotel every year,” Sam said. “It was always huge fun. But this year I spent the whole time I was there working the phones calling London. I had to get the ODL deal done. The horrendous nightmare would be over. I had Bob working in London. But he couldn’t get ODL o! their asses. Either they were scared or something was wrong. On the day of the parade, I was in a store in New Orleans buying beads and trinkets to throw into the crowd when I started to yell at Bob on the phone. I told him I was going to get the bonds myself. I knew the powerful families were in the Caribbean at the time—that was where they congregated during the winter. They owned a few of the best islands. I was screaming at Bob, saying, ‘I don’t fucking care who does the trades, I don’t fucking care about a few percentage points.’ I was trying not to scream too loudly because a bunch of my investors were with me.
“It was clear to me that Bob didn’t know how to get it done. I kept asking where the paper was and he didn’t have an answer. He said there was a dearth of bonds. The books were done for the year. There were only certain times when trades were available. The families only allowed a speci"c number of tranches so they could retain control. I told Bob I didn’t care—I was going to kill McNeil and the ODL people. They put me in an awful position. My name was going to be bad in this market.”
Then Barry McNeil called. The "rst tranche of $100 million was going to trade on Fat Tuesday. But nothing happened. Once again, Sam called McNeil.
“Why the fuck aren’t you trading my money?” Sam yelled. “Do the fucking trades.
Get it done.”
“There’s nothing to be done,” McNeil said. “The markets are scarce.”
“Fine,” Sam shouted, hanging up. “I’ll get the paper myself.”
THE MYSTERY OF BARRY MCNEIL’S constant failure to consummate a trade could be solved with two words: Graham Wellesley. The ODL executive in London knew that McNeil was up to no good—he just couldn’t see what was behind all the commotion.
The "rst time a trade had been about to happen, Wellesley had discovered di!erences in the bonds being sold and those described in the trading instructions. The variance seemed designed to create a smoke screen, leaving Wellesley to explain why ODL had enabled a fraudulent transaction.
“The exact same thing happened when Barry tried to trade the second time,”
Wellesley recalled. “There were discrepancies. Small ones but enough to stop the trade.
I knew something was up. I didn’t know what. But I wasn’t going to agree to trade anything without knowing it was legitimate.”
So Barry McNeil quietly departed the scene. Not in a dramatic fashion. There was no falling-out. There were no harsh words. McNeil had been defeated. He’d failed, it seemed. He hadn’t made any trades. His attempt to defraud Israel and the others had come to nothing. No money had changed hands. Downcast, it seemed, McNeil #ew back to South Africa with Katherine Carnegie; she was still his girlfriend, it turned out, despite her fake flirtations with Sam.
“There was never a time when Barry said the trade wasn’t going to happen,” Tim Conlan recalled. “There was no big crash. It was delay, delay, delay. I began to wonder about the bond market. Did it even exist? I didn’t worry about there being something wrong—as in dishonest. But what was really going on?”
BAYOU’S AUDIT FOR 2004 was released at the end of March. Richmond-Fair"eld reported that the fund had $410,626,200 under management. The real number was anyone’s guess. The loss, in terms of actual money, was perhaps $75 million. If the accumulated performance was considered part of the “lost” money, then nearly $250
million was gone—money that had never existed in the "rst place. With $100 million in London and $50 million tied up in dubious VC investments, Bayou was essentially broke. But that didn’t stop Marino from wiring $15 million to the Cayman Islands to keep his venture capital plays alive and provide getaway money.
As Israel and Marino drove to Manhattan to see another investor who was considering redeeming, Marino’s cell phone rang. It was FBI Special Agent Carl Catauro looking for Sam; the o$ce had given him Marino’s number because Israel rarely answered his cell phone. Marino passed the phone to Sam. Marino listened as Sam discussed the FBI’s investigation of Bob Nichols and the European trades. Marino was #abbergasted. Hanging up, Sam assured him that the FBI had no clue about the Bayou fraud, which was true, though amazing; the bureau knew that Sam was involved with Nichols and other scammers, but no serious investigative steps had been taken to see what was going on at Bayou. Marino didn’t reply. He stared out the car window.
In the following weeks Sam frantically worked half a dozen cell phones trying to "nd a trade. Back and forth to London he #ew. He was escorted to the airport by a local cop he’d befriended who lit up his cherry tops on the way to JFK so Sam could cut through tra$c. At the security line Sam #ashed a law enforcement badge he’d obtained. He’d created a persona for himself as a man like Bob Nichols—but it was all a concoction.
The end was nigh, he knew. For the Easter holiday Sam #ew to the Caribbean island of St. Barts with Debra Ryan. If Sam was going to go down, at least he’d have a tan. He told Ryan that the billions were going to start to roll in. He lolled naked on the deck outside his villa, as if he didn’t have a care in the world.
But Sam’s desperation was expressed in the increasingly improbable schemes he got involved in. Months earlier, he had met a South African broker who claimed to represent the De Beers, one of the Chosen families. Out of the blue sky, the broker said he’d found “paper” to trade. But the minimum investment in these bonds was $500
million. Told that Sam had “only” $100 million, the South African generously agreed to drop the entry level—but just this one time. As always, though, the deal wasn’t completed.
Sam was now completely isolated from his old friends. He never returned calls or e-mails—personal or professional. Worried, one of his best friends came to the Trump house and confronted him about the people he was surrounding himself with—users, hangers-on, sycophants. Bayou’s employees were constantly seeking favors from Sam.
The same was true of the strangers Sam was now associating with. But Israel wouldn’t listen to his friend, which led to an argument that quickly escalated to a shouting match. Sam shoved his friend against the wall and threatened to throw him o! the balcony where they were standing. Both calmed down, but it was a shock to Sam’s friend to see him so alone and so di!erent from the gentle goofball he’d known so well.
It was as if Sam was no longer able to see the obvious truth about other people—or himself.
To stave o! the sense of claustrophobia closing in, Israel grew even more manic and unpredictable. Willing to try anything, he revived the idea of going after Yamashita’s gold. He reasoned that he could get a reward of $75 million if the Federal Reserve paid even 3 percent of the face value of the $2.5 billion in bonds that was supposedly in the “motherbox.” Sam didn’t know about McNeil’s planned mission or Nichols’s investment in it. A retired Special Forces soldier named Jimmy Bates agreed to lead the mission.
Sam #ew to Baltimore in a private jet with John Ellis to meet Bate
s. The colonel seemed extremely paranoid as he talked about how the federal government used satellites to track people. Bates paced around the hotel room frantically. In return for $1 million up front, Bates said he’d form a team of Filipino Special Forces soldiers he knew to stage a raid. Mindanao was home to an extremist group with the unlikely name MILF, for Moro Islamic Liberation Front. What if the Fed bonds wound up in the hands of MILF and Osama bin Laden? Bates wondered. If Al Qaeda controlled billions it would be a cataclysm of biblical proportions.
As improbable as it sounded, Bates really was a Special Forces veteran with top-secret clearance from the Pentagon. Bates proposed that once the Fed bonds had been obtained they should be #own to Guam, where they could be appraised and quietly brokered to the government. Sam was ready to fund the venture once the trading began —if it ever did.
Down to his "nal days, Sam gave up on ODL. The whole interaction had been pointless and maddening—and it had consumed a huge amount of Sam’s most precious commodity: time. As spring of 2005 arrived, it was only a matter of weeks (or even days) before Bayou’s fraud was exposed, Sam was now certain. Sam contacted a man named Lew Malouf in California. Malouf supposedly owned the Sacramento Kings—but a simple computer search would have revealed that he spelled his last name di!erently from the real owner. He claimed he ran a secret Fed trading program for Paci"c Rim countries. Malouf told Sam that he had “paper” ready to trade. He said that Sam’s pro"t would be $695 million. As ever, all Sam needed to do was wire $100 million to Malouf’s account. “Now for the surprise,” Malouf e-mailed Sam on the eve of Sam’s sending the money from ODL to the United States. “With the deployment of 12 cycles you will actually receive $1,597,750,000. But there is one small catch. We might have to use an alternative company name on the bank account. This will only be done if necessary and the bank says, ‘It is time to change names.’ But it will still be your profit.”
“I had a sinking feeling about the deal,” Sam said. “But believe it or not, I still believed it was going to happen. Malouf swore it was going to happen any day. We were going to get paid any minute. They said the programs were already trading, we just had to get in on the action.”
When the equally hopeful and deluded Robert Booth Nichols heard of Sam’s new venture, he was concerned he was going to miss out on the big payday. Nichols wanted to ensure that he received 10 percent of Sam’s windfall, as they’d agreed, still more proof that the CIA asset believed in the shadow market. Sam assured him that there would be more than enough money to share. But Nichols wasn’t satis"ed. The trust the two men had for each other had been destroyed. Nichols dispatched his wife to California to introduce herself to Malouf and his brokers. He sent an introductory letter with her. But Malouf wasn’t interested in honoring any side agreements.
Shut out of the deal, Nichols decided that he’d had enough. He’d scored $10 million from Israel. He was sixty-one, with failing eyesight and poor health. He needed to put some distance between himself and Israel. The bewildering swirl of events that had started in a taxi in London was about to come to an end. The mystery of Robert Booth Nichols wouldn’t be resolved—at least not yet.
“We had a big blowup,” Sam said. “It seemed contrived to me—like he was deliberately picking a "ght. We’d written in our agreement that he was going to be the head of security for me for "ve years. That was supposed to be payment for the ten million. To make it look legit. But now Bob didn’t want to perform the services. He said he’d given me the booby-trapped box in the Queen’s Vault and that was worth ten times more than the ten million. All of a sudden he didn’t want to be involved anymore. He didn’t want to talk to me. It all came apart very quickly.”
At the same moment, the Malouf deal seemed to come together. Sam sent wiring instructions to London for ODL to transfer $100 million to an account in Hong Kong that Malouf had established. But there was an obstacle in Sam’s way: again Graham Wellesley, the great-grandnephew of the Duke of Wellington. Wellesley was now certain that Israel was involved in criminal activity of some kind. Under British law, ODL was not permitted to directly contact the American authorities; Wellesley had to work through regulators in London. He asked them to notify their counterparts in New York about Sam’s highly suspect activity.
“So the regulators called me from New York,” Wellesley said. “I told them what was going on. They said, ‘Whatever you do, do not return the hundred million.’ Sam didn’t know anything about any of this. I couldn’t tell anyone, not even my sta!. It was strictly con"dential. I told the Americans that I needed an injunction or something because it was Sam’s money. The money was on call. I couldn’t just refuse his request to get the money.
“When Sam tried to take the money out I delayed. I told my sta! to wait until the banks in the United States had closed for the day. So that bought another day. The next day I had my operations guy send Sam an e-mail saying he had ‘forgotten’ to send the money. Sam freaked. You don’t forget to send one hundred million. Sam called up from New York screaming and yelling, ‘You fucking assholes. Pay my goddamn money back.’
He had a hell of a temper. He said he was going to kill my operations guy. I don’t think he meant it. But still.”
Unaware that ODL hadn’t actually wired the money, Malouf informed Sam that the funds had arrived in Hong Kong. The money was in the account of a company called Majestic Capital Management, which was controlled by one of Malouf’s collaborators.
But the bu!oonish Malouf hadn’t performed even the most simple steps to disguise his intentions. The money was supposedly at a brokerage account in a discount trading website connected to Wachovia Bank. The online balance was stated to be $100
million. But Marino was able to see that Malouf had created a fake account—a phantom.
“I tried to explain this to Sam but he wouldn’t listen,” Marino said. “You’d think that after committing a fraud for so many years he’d recognize a fraud. But he didn’t.”
For Israel, doing something, anything, was better than doing nothing. Sam repeated the demand that ODL release “his” money—this time to an account in the United States that Malouf’s coconspirators controlled. Wellesley could hold out for only so long.
Despite the viscount’s express request for guidance from American regulators, they had done nothing; the negligence of the authorities seemed to know no bounds. On April 12, 2005, ODL wired $99,191,102.18 to a suburban branch of Wachovia Bank. The money was no longer in Bayou’s name. Following Israel’s instructions, the funds were sent to Majestic Capital. It was the usual modus operandi of the shadow-market con. Once the money was out of Sam’s control, in a so-called nondepletion account, the only question was whether Malouf could convince Wachovia to release the funds before the law caught up to the scam—if the law ever took any action.
“I was truly desperate,” Sam said. “I was appalled. I was like a guy at the casino who had lost everything. He’s got enough left for one last bet. So I put it on the roulette table and let it spin. I figured I had one hundred million. I was still alive.”
* That this exchange took place is based on Nichols’s subsequent testimony, which remained under seal until it was leaked to the author by a confidential source.
CHAPTER EIGHTEEN
Redemption
Cameron “Kip” Holmes worked in the Financial Remedies section of the Arizona Attorney General’s O!ce. It was a backwater in the "nancial regulation world, a metaphorical million miles from New York and London. But Holmes had made himself a leading expert on the secret bond market. Holmes had participated in seminars that had resulted in the publication of a book called The Myth of Prime Bank Investment Scams.
To those who’d studied the phenomenon, the variety of fraud Sam Israel had fallen prey to was the “crime of the century.” There weren’t just a few prime bank scammers in Europe. It was a global industry, the dis"gured o#spring of the secretive Federal Reserve system. Thousands upon thousands of “financial advisors” around the world
ran schemes to get their clients to invest in high-yield investments. Many likely believed in the existence of the market, though it is likely that many were also running Ponzi schemes.
By the time Sam met Robert Booth Nichols in 2004, more than $10 billion had been lost to high-yield fraud, according to the best estimates. Countless billions have been lost since, despite warnings from the SEC, the IMF, the World Bank, and the International Chamber of Commerce. There were endless variations to the scams, but the themes were common. All claimed securities were issued at steep discounts for the lucky few able to make the trades. MTNs, zero bonds, debentures—all the structures promised to double or triple the investor’s money in a matter of weeks. The best marketing tool was the corrupt institutions propping up American capitalism: the bankruptcy of the Federal Reserve, the duplicity of Wall Street, the machinations of the federal government as it created a New World Order.
Over the years, Holmes had been extremely aggressive in using the jurisdictional powers from his obscure Arizona o!ce to indict and prosecute fraudsters; if high "nance was like the Wild West, then Holmes was the laconic sheri# with the quick draw newly arrived in Dodge City. It seemed obvious to Holmes that something was amiss when he received a Suspicious Activity Report regarding $100 million on deposit in a branch of Wachovia in suburban New Jersey. The branch manager had become alarmed when a man turned up and tried to transfer the money, saying only that it was for “Fed-rate bond deals” and refusing to reveal more lest the bank “steal” his “positions.” A drive past the headquarters of the company called Majestic Capital by a bank employee revealed it was a small bungalow in a residential area. Holmes’s basic research revealed that Malof didn’t own the Kings. The real owner was named Maloof, Holmes discovered, noting the di#erence in spelling. The Suspicious Activity Report Holmes received stated that a Hollywood production company was also supposed to receive the funds, a dubious proposition considering that Paci"c Media Entertainment’s prior "lms included Viva la Vulva and Self Loving: Portrait of a Woman’s Sexuality.
