Octopus, by Guy Lawson, is a tragic story in which greed plays the main character. Sam Israel also plays a major role in this story as the disgraced hedge fund trader who ultimately lost it all after his huge fraud unraveled before his eyes.
Sam Israel was known for his ability to make money; however, Mr. Israel was actually born into more money than most Americans see in a lifetime. Sam’s ancestors were highly successful commodities traders from New Orleans. Growing up, Sam watched his father and grandfather trade in the New York Stock Exchange; he knew from an early age that he belonged on Wall Street. Through family connections, Sam was able to meet Freddy Graber, “the king” of Wall Street. Freddy was one of the first men to start a hedge fund in the late 1970s, and Sam (age 18) was given the opportunity to work as a runner for Graber on the floor of the exchange.
Through his connection with Mr. Graber, Sam quickly learned of the unlimited success that could be obtained as a hedge fund trader. Sam learned through Freddy that in order to win big in the trading world, you had to be okay with big losses as well; this concept stuck with Sam and later played into his ultimate defeat. Sam also learned from Mr. Graber a thing called the “brother in law rule”. In Wall Street, there was no such thing as a secret, if a deal was being made, there was always a way to find out about it; Graber hooked Sam up with connections for insider trading. As Sam set out on his own in the mid 1980s as a young married man, he realized that Wall Street was changing due to the introduction in computers and data analysis tools. Sam became obsessed with computer trading and began to form his own program called “Forward Propagation”. In 1996, Sam began to run his hedge fund Bayou from his own basement. Sam teamed up with another trader, Jimmy Marquez and hired an accountant named Dan Marino to keep the books; the fund began with an initial fund of $600,000. In the first year, the fund doubled to more than one million. The men felt unstoppable at this point and they became more overconfident for the success and growth of Bayou. However, as their confidence grew their luck did the opposite. Bayou began to produce losses in the next year, meaning that investors would soon want their funds redeemed. Dan Marino then came up with the idea that would be the foundation for the Bayou fraud; Marino used $400,000 of broker commissions to hide the actual performance numbers. From this point on, Bayou was doomed. September 11, 2001 hit Bayou hard; the fund lost $35 million. Marino knew that they needed to close the fund, yet Sam refused. If Sam would have closed Bayou he would have been forced into bankruptcy. Sam unsuccessfully and desperately sought out ways to recover Bayou’s actual losses; each year, Marino would end up cooking the books to meet desired return rates. The main issue in this story occurs in 2004, when Sam was introduced to Robert Booth Nichols. To Sam, Nichols was a savior who could help him save Bayou. In the end, Nichols turned out to be a well known con artist who successfully stole millions (of Bayou’s money) from Israel. Robert Nichols knew that he could successfully con Sam by becoming his closest business partner. Nichols convinced Sam to start trading in the “Shadow Market”, a secret high yield market run by a secret government. Sam became captivated by the Shadow Market and Bob Nichols; in April of 2004 Sam wired over $150 million of Bayou funds to be traded; not one penny was ever actually traded. Sam completely stopped trading on the NY stock exchange without informing Bayou investors. Sam Israel was deeply captivated by his new business partner and believed he had taken on a new life. Sam quickly became obsessed with the “Shadow Market”. Nichols had Sam convinced that he was a wanted man by many people, and that absolutely no person could be trusted or invited into the Shadow Market. Back in New York,...
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