A scam stranger than fiction

Book review: Move over, Madoff. Sam Israel’s Wall Street swindle is a spy thriller come to life in Guy Lawson's Octopus.


(Photo: Natalie Castellino)

Like so many frauds, Sam Israel’s big con—a decade-long deception that cost investors millions and ended with the hedge funder on the lam as one of America’s Most Wanted—began with a small act of self-delusion.

It was 1997, and the headstrong trader had just launched a new hedge fund backed by a proprietary computer program that he believed could cut through the chaos of the market and reveal truths invisible to the rest of Wall Street. Israel had been born into fabulous wealth—the scion of a dynasty of commodity traders who hobnobbed with heads of state and captains of industry—but this fund was the chance to strike out on his own, without family baggage, and take his place among the titans of Wall Street.

The problem was, his program didn’t seem to be working. He was losing money at a critical time for his delicate young fund. So Israel’s first lie was to himself: if he could just buy a little time, hold off investors with some creative bookkeeping, earnings would rebound and everything would be all right. Instead, he lost again. That one instance of shady bookkeeping led to the creation of audits from whole cloth. A few casual lies became an intricate scheme. And Sam Israel’s world-beating hedge fund mutated into a $450-million Ponzi scheme.

Toronto-born journalist Guy Lawson’s new book, Octopus (Crown), tells the thrilling tale of Israel’s fraud, capturing the trader’s growing sense of claustrophobia as he snorts coke, works the angles and gets more and more entangled in his own lies. While documenting Israel’s fall, Lawson’s book begins as a straightforward, well-reported account of financial malfeasance. Mid-way through, when Israel meets a man named Robert Booth Nichols, Octopus turns into something infinitely stranger.

Google “Robert Booth Nichols” and you’ll be transported to one of those dank, poorly lit corners of the web where paranoid theories and seductive half-truths about the secret inner workings of government flourish. As far as Israel could tell, Nichols was a CIA black-ops asset and a mob associate, a hit man and an arms dealer. Lawson describes Nichols as “the Zelig of conspiracy theories”—a mystery man rumoured to be involved in everything from the Iran-Contra scandal to the CIA’s MK-Ultra mind control experiments to the JFK assassination.

Israel was impressed. The trader was frantically searching for a big play that would free him from the trap he had built himself, and Nichols seemed to be the answer. According to the mystery man, “the basic institutions of the modern world—the U.S. government, the United Nations, the International Monetary Fund—were all a front,” writes Lawson. The Federal Reserve was a con, and in order to keep the system solvent it traded heavily discounted bonds in a “shadow market” only available to the elite of the elite. Nichols said he could get Israel into that market. All they had to do was avoid the many tentacles of the dangerous cabal trying to keep people like Israel away from the money—a shadowy entity known as “the Octopus.”

What follows is a series of spy-thriller escapades that could have been plucked from a Jason Bourne movie. Israel meets an array of shady characters—dissipated European noblemen, the head of the Royal Knights of Malta, a lantern-jawed Hollywood actor with gigantism and connections to the Mob. Israel learns to pack a gun in the small of his back. He takes possession of a metal briefcase he believes is filled with $100 million of Federal Reserve bonds and booby-trapped with explosives. He sits spellbound in a darkened hotel room, watching what he’s told is the real, unedited Zapruder film of the J.F.K. assassination.

Lawson’s book is more fun and thrilling than any work of journalism about hedge funds has the right to be. At times, it’s difficult to tell exactly how much of what Lawson describes is objective truth, another one of Israel’s deceptions, or a swindle being perpetrated on the desperate trader. What’s certain is that Israel the con man got caught up in a con exponentially larger and weirder than anything he could have dreamt up on his own.

How does a seemingly sophisticated trader such as Israel fall for such an outrageous conspiracy? Israel always said he had a desire to “see what other people couldn’t see.” It’s a feeling many of us share, the same desire that makes people demand President Obama’s birth certificate and turns books like The Da Vinci Code into bestsellers. Unlike the rest of us, however, Israel had legitimately witnessed just how strange and corrupt the financial system could be.

Growing up, Israel’s own powerful family had been inside a circle that had propped up corrupt dictators and manipulated the market. Coming up on Wall Street in the ’80s, he had delivered briefcases full of cash for a legendary hedge funder who made his fortune insider trading, front-running, and generally playing government regulators for fools. “I learned that Wall Street was an illusion,” Israel says. “There were different magicians using different tricks in different ways. But everyone cheated.” By the time Nichols got to him with his stories about a shadow market, the con man was only saying what Israel already knew: the world is run by crooks, and the few men canny enough to understand this could make a fortune.

In the end, Lawson’s surreal story makes a tidy parable for this latest episode in American finance. After all, in the early 2000s—the age of Enron, WorldCom, Global Crossing and others—so much of Wall Street was a con. Israel was arrested just before Bernie Madoff. He was jailed just as the entire financial system came crashing down, revealing all those triple-A–rated securities to be as flimsy and illusory as anything Israel had sold. This madcap version of Wall Street doesn’t demand a morality tale from Oliver Stone. It demands a farce. In Sam Israel, Lawson has found the antihero of the moment—arrogant and credulous, cockeyed with greed, and stumbling headlong into calamity.