The Fall of Sam Israel

Sam Israel is a scumbag. He is a liar and a cheat. He admits so in Octopus by Guy Lawson. Israel was the nefarious trader behind the Bayou Funds, one of biggest hedge fund ponzi schemes, at least until Bernie Madoff finally fell to Earth.

Lawson met with Israel while Israel was in prison. He want to write about Israel’s fraud at the Bayou Fund. Lawson found him to be devious, defiant, impossible to not like.

Israel started as a trader, not an investor. He made his money on the short movements of stocks. He made his big money by cheating. He would front run client trades. He would trade on inside information.

Then he decided he want to be his own boss, so he started the Bayou Fund. But he was not successful. Rather than disclose this to investors, he rebated a big chunk of brokerage fees to show a good return. He figured he could make it up in the next trade.

Then he missed again. Again, he didn’t want to admit his shortcomings so he chose the path of deceit. But now the amount was too much to fix with creative bookkeeping. He turned to a complete fabrication of financial results. Israel called this “The Problem.”

He kept trading to try to fix The Problem. He thought the next trade could make enough to fix The Problem. But it kept getting bigger as his actual results continued to be well below the result he was telling investors.

Then Israel ran into a shadowy figure that told him about a secret market for prime government bonds sold at huge discounts. He could get enormously wealthy by trading in the secret market. Israel thought he had found a solution to The Problem.

The publisher was nice enough to send me a copy of the book. It caught my eye because it offered an insight into the mind of a fraudulent fund manager and the machinations of a ponzi scheme. It’s a twisted mind. The tale of trying to fix The Problem is even more twisted.