The U.S. Government Is a Sham. The Federal Reserve Is Running a Secret Bond Market. Global Finance Is Controlled by an “Upperworld” of Rogue Black-Ops Fixers.

 

And other things that Sam Israel, the Ponzi schemer who cheated investors of $450 million and faked his own suicide, truly believed.

 

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Illustration by Tim McDonagh

 

The first rule of a confidence game is that it is impossible to con an honest man. Con men are not thieves, at least in the conventional meaning of the word. They offer a deal that is too good to be true, that any honest man would know to be too good to be true, and make the mark believe it to be the truth—the urgent, lucrative, top-secret truth.

“Investing in Bayou entails substantial risks,” marketing material for the $450 million hedge fund acknowledged in February 2004. “Bayou Funds are single-manager funds. This eliminates diversification of viewpoint and expertise.” Investors were entrusting their money, they were told, to one person: Sam Israel.

Israel was the middle-aged scion of a legendary family of commodity traders, still boyishly eager to make his own name in the more breakneck corners of Wall Street. He had been running Bayou since 1996, when he launched it in his Westchester basement with less than $1 million invested. He had been falsifying Bayou’s returns since the very first annual audit—first in a panic to cover a single bad bet on gold, then systematically to hide losses that seemed to accrue every quarter. Israel told investors he’d invented a computer program called “forward propagation” that had the quasi-mystical ability to foresee the future by a few seconds—or a “tick.” The program, with indicators that would light up like a slot ­machine to make an investment recommendation, was correct precisely 86 percent of the time, Israel said. And for years, the returns seemed to reflect its foresight: An investment in Bayou of $1,000 in 1997 was worth $4,000 by the beginning of 2004, according to company filings.

 

 

But the fantastic performance was just that: a performance. In truth, Bayou was down more than $100 million, losses Israel had covered with fake profits he’d inserted into financial statements in an ambiguous line called “Due From Brokers.” The hedge fund had its own fictitious auditing firm established off-site, and while records at Bayou’s clearinghouse, SLK, clearly showed annual losses, SLK’s parent company, Goldman Sachs, neglected to scrutinize the paperwork. When the SEC finally asked to see the company’s numbers, in 2004, Bayou’s CFO scrambled to falsify the material. But Israel told him not to bother—the regulators wouldn’t understand the slew of data and wouldn’t dare call out the fund if they did smell a rat. They didn’t.

Investors gave Bernie Madoff money because they trusted him. They gave Sam Israel money because they liked him—a gregarious, disarming goofball who, as a Wall Street apprentice, had invented an alter ego he called Captain Proton, a fearless superhero whose special powers were granted by vodka and cocaine. Now in his forties, he lived in a Westchester mansion, rented from Donald Trump for $22,000 a month, with an adjacent chapel in which he had built a replica of the Bayou trading floor alongside an 800-­gallon saltwater fish tank and a menagerie of rare reptiles. He’d also installed a high-end studio for jam sessions, where he’d play with the Allman Brothers’ drummer when the band was in town. He owned a fleet of Porsches and signed personal checks printed with the image of SpongeBob SquarePants.

But he was also a man living under a mountain of lies, and the stress was killing him. He’d had a series of major back operations and open-heart surgery. He’d been diagnosed as bipolar and prescribed Depakote (for seizures), Neurontin (an antiepileptic), lithium (a mood stabilizer), Wellbutrin (for depression), and Zoloft (for anxiety)—a cocktail he washed down with a handful of opiate painkillers.

His marriage to his high-school sweetheart was in shambles. Once he’d welcomed his family home from a short trip standing in the driveway wearing cowboy boots, his wife’s bikini underwear, a lacrosse helmet, swim goggles, a life jacket, and a cape, then started screaming at his wife when she didn’t get the joke. He’d fallen asleep over the turkey at a Thanksgiving dinner meant to be a kind of reconciliation. When his wife found him bent over a pile of white powder on his desk with a $20 bill in his nose, he went for the big lie: How dare she suggest he was snorting coke?

“There was a black hole in my heart,” Israel recalls. “It weighed on me all the time—on my shoulders, my heart, my mind. I was always surrounded by blackness.”

He was desperate to fill the hole—to find some way of making $100 million quickly. “I knew no one would care about the fraud if I got the money back,” he says. “This is America. No one cares how you make money as long as you’re making it.”

 

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“I’ve heard that there are five families that run the world,” Israel said. “Thirteen,” corrected Nichols.
(Photo: Illustration by Tim McDonagh)

 

A Wall Street friend just out of jail told him that prisons were filled with aspiring traders and about a system perfected there that yielded 100 percent annual returns; Bayou invested $5 million, losing most of it in a couple of weeks. Desperate, Israel turned to a father at his son’s private school, a cousin and friend to George W. Bush, for an investment pick—and not just any pick. “If you’re going to bring me a company,” he said, “make sure it’s going to go up tenfold, not just a few points.” At an investors’ meeting on the Isle of Man for the start-up the father had suggested, Israel’s CFO got wind of another company, Debit Direct, whose preposterous plan to compete with Western Union and MoneyGram wasn’t entirely clear, but whose pitchman, a six-foot-six venture capitalist named Jack O’Halloran, hugely impressed ­Israel—telling him he had acted in Superman, Dragnet, and King Kong, slept with Hollywood starlets, and fought George Foreman at Madison Square Garden. All of this was, improbably, true. O’Halloran also told Israel that he was the secret love child of a Gambino-family crime boss and that he was writing a firsthand account revealing the truth about the Kennedy assassination—that the president had been shot by his driver and the footage edited out of the Zapruder film by the CIA. Israel invested $2 million in Debit Direct, followed by $500,000 in O’Halloran’s book.

Worried about Israel’s emotional well-being, his new interior-decorator girlfriend suggested he talk to her psychic, who communicated with a Native American spirit named Silver Cloud. “Good things will happen in the next month or two,” the psychic told Israel. “A financial opportunity will present itself that could make a big change for you.” The psychic said that a man named Robert was going to enter Israel’s life and have a big impact. He couldn’t quite hear all that Silver Cloud was saying about Robert—the spirit’s voice was too faint. But Israel should be prepared.

Afterward, his girlfriend eagerly asked how the session had gone.

“It was a bunch of bullshit,” Israel said, rolling his eyes.

Days later, a man named Robert did enter Israel’s life. He was introduced by Jack O’Halloran, who was having Chinese food in the chapel when Israel began complaining that the hedge-fund business had gotten tedious.

“There are paradigm shifts on Wall Street every ten years,” Israel told O’Halloran. “When I started, it was insider trading and soft-dollar scams. Then it became IPOs and the dot-com bubble. Now it is high-frequency trading. The banks are front-running the market like crazy. I’m trying to figure out what’s coming next.”

“There’s a technology I’ve heard about that might be good for your trading system,” O’Halloran said. “But the guy who knows about it is really secretive. I shouldn’t even be talking about him. He’s very deep into CIA black ops.”

O’Halloran said the man’s name was Robert Booth Nichols—a national-­security asset whom O’Halloran called a real-life Jason Bourne. “Bob is a keeper of the secrets of the world,” O’Halloran said. “That’s the only reason he is still alive.”

Later that night, Israel turned on his computer and typed the name “Robert Booth Nichols.” Hundreds of links appeared—Nichols seemed to be a kind of conspiracy-theory superstar. According to one manuscript Israel downloaded, Nichols was a CIA assassin, illegal-arms dealer, mob associate, and con man. He had been involved in virtually every nefarious covert plot carried out by the U.S. government for the past three decades, the book said: Iran-contra, the October “surprise,” MK Ultra. When the CIA dealt heroin to fund a war against Hezbollah, Nichols was supposedly there, and when three people were murdered on the Cabazon Indian Reservation, Nichols was there, too, developing biological weapons, a laser gun, and machine guns to arm Nicaraguan rebels.

But it was another story involving Nichols that captured Israel’s imagination. The manuscript described how, through front companies in the eighties, the CIA had covertly sold a computer program named PROMIS to banks and financial institutions like the Federal Reserve, then used a trapdoor in the program to secretly monitor financial transactions digitally. (Pieces of this story had been reported elsewhere, particularly after Inslaw, the company that had originally developed the program for use in the court system, sued the Department of Justice.)

“A lightbulb went off in my head,” Israel recalls. “If I had PROMIS, I could track the movement of money. I could see how the Fed operated. If money was going into semiconductors, then I could get there ahead of the market. The same for consumer goods or oil and gas. I would be at the flux point. I would slay the market. I was going to make so much money it wouldn’t even be fun. It would be the ultimate inside trade.”

 

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“The guy was taking aim to shoot Bob. I pulled my Beretta out, and I shot at the guy. I hit him in the left hip, then walked over and shot him in the head. Point-blank. His head exploded all over the sidewalk.”
(Photo: Illustration by Tim McDonagh)

 

I first met Israel in 2008, not long after he’d been sentenced to twenty years in prison for the Bayou fraud. After the sentencing, he had faked his own suicide to avoid jail time, leaving the simple note SUICIDE IS PAINLESS in dust on his GMC Envoy on Bear Mountain Bridge in upstate New York—a stunt that earned him two more years in prison. Israel wore an orange jumpsuit and nursed a broken hand from a fight with another inmate. He was heavily drugged, a deluded but disarmingly likable raconteur. And he had an incredible story to tell about his role in a high-stakes confidence game so big that not just the future of Bayou but the solvency of the global economy and the fate of world government would hang on it—or so he had believed.

When he began to tell me that story, he promised to tell the truth—a vow I treated with profound skepticism. Often I found myself doubting not just his story but his sanity. Inevitably, there are twists and turns in Israel’s tale that have to be taken on his word alone—this is the story of a self-confessed con man, after all, and in some cases, for legal reasons, I’ve used pseudonyms in describing unprosecuted crimes. But whenever it was possible for facts to be checked, I was able to confirm his account, if not his interpretation, with sealed legal documents, confidential financial records, and previously classified FBI reports. In the year before his arrest, Israel had been living a kind of fantasy life, at the very center of an impossible-to-believe international conspiracy that mixed elements of dime-novel spy thrillers and an Illuminati-style financial cabal. But it was a fantasy life that had been remarkably well choreographed for him by a master confidence man who wove the story with just enough plausible detail, and staged just enough real-world encounters, that Israel, a con man himself, had come to truly believe it.

The Dorchester Hotel in London was the setting for Israel’s first meeting with Nichols. It was the spring of 2004. The pretext was the investment Israel had made in Debit Direct, which was going to pay Nichols to facilitate access to the CIA’s top-secret biometric technology. As two engineers present began discussing the challenges of the project, Israel leaned over to whisper in Nichols’s ear. “I need to talk to you privately,” he said.

“Aren’t you part of this group?”

“This has nothing to do with them,” Israel said. “I’m here to talk about something different. PROMIS. The computer program.”

“Who are you?” Nichols asked once they’d slipped separately out of the meeting.

“I run a fund called Bayou,” Israel said. “I’m a trader.”

“Do you have $100 million in cash?”

It seemed to Israel that Nichols had tossed out the huge number as a way to brush him off. “I do,” he said.

“Do you have $150 million?” Nichols asked.

“Yes.”

“Do you have $200 million?”

“That’s pushing it,” Israel said.

“You should forget PROMIS,” Nichols said. “I know how to put your money to work.”

Nichols told Israel that the most powerful institutions of the modern world—the U.S. government, the U.N., the IMF—were all a front. “There is a secret government operating within the world’s government,” he said. “They run a secret trading program—the high-yield market. Only a few chosen people participate in the program. The returns are staggering. The proceeds are used to fund black operations, fight wars, pay off foreign governments, and conduct good works in the Third World. I don’t know if I can get you into the market. But I know people who can give you a shot.”

Nichols called the secret society the “Upperworld.” The large banks that were designated primary dealers by the Federal Reserve—Goldman Sachs, Deutsche Bank, Union Bank of Switzerland—also operated in the shadow market. The Federal Reserve was a private company, Nichols said, designed to hide the reality that the United States government was bankrupt. If Israel managed to gain entrée to the market, he could double his money in a matter of weeks.

Israel listened carefully, disbelief turning to excitement. Growing up, he had heard how the Israel family had cornered the market for cocoa not once but three times in the fifties and sixties. His family had been friends with the titans of Wall Street—Alan Greenspan, Larry Tisch, Sandy Weill—and he had seen the dealings of financial power brokers up close. But that didn’t make him skeptical of Nichols’s story; it made him credulous. “I knew Bob was right,” Israel told me. “I’d grown up watching how things were manipulated.” It made sense that there was a secret shadow market. He wanted in.

On April 14, 2004, Bayou wired $150,999,847.42 to an account at Barclays in London. Under the terms of the agreement with Nichols, Israel was now called the “Benefactor.” Israel believed he’d read the terms carefully, though he never managed to explain to me precisely how the bond market was supposed to work or where the profits were meant to come from. “The parties agree that the financial return to the Benefactor shall be one hundred percent (100 percent) paid every ten days.”

Investing in the high-yield market was financially risk-free, Nichols had explained, but just attempting to trade in it meant that Israel risked being killed at any moment by a rival faction angling for control over the lucrative bonds. Their own faction, Nichols told him, would include John Cassidy and Nigel Finch, whom Nichols introduced at a London lunch as intelligence operatives but were likely “shills,” or bit players in the con. (“Cassidy” and “Finch” are pseudonyms.)

Finch was a suave Englishman—a veteran of MI6, Nichols told Israel, who ran an antiques store in London and was a fellow of the Royal Society of the Arts. Cassidy was a former CIA station chief, a pilot for Air America during Vietnam, and a descendant of a legendary Old West gunslinger. “Bob didn’t really trust Cassidy. But he said Cassidy was the only way to get into the market,” Israel says. “He was truly freaky looking. He had tattooed eyebrows. He limped badly. He was short. His teeth were fucked up. He was one scary-looking dude.”

Nichols told Israel that the three men had squired wealthy people into the market for years. But all they had received were broker commissions. Now, with Israel’s $150 million, they would have the chance to get into the game as principals.

There was more: Their trading wouldn’t just make them all impossibly rich, Nichols said. It would change the world. Since traders were only allowed to keep a portion of the profits for themselves, a charity was a necessary part of the structure of any faction. Their extra money, the men told Israel, would be used to cure aids.

Finch and Cassidy showed Israel a zinc-based mineral supplement they said they had developed. In drop form, it had been proved to drastically reduce levels of HIV, they said, but the medicine wasn’t available because pharmaceutical companies were making a lot of money selling antiretroviral drugs and were protected by the American government.

As Israel inspected the medicine with interest, the three men watched him expectantly. Cassidy especially.

“Do you have a problem with me?” Israel asked.

“You’re Mossad,” Cassidy said.

Israel laughed. “You’re out of your cabeza.

Cassidy sneered. “Have you had any heart trouble?”

Israel was flabbergasted. There was no way some stranger could know about his condition. No way.

“You’re on something called the Intellectual Threat to State list,” Cassidy said. “The CIA poisoned you and made it look like it was heart failure. There are people who want to kill you. You’re either very lucky or you’re in great shape.”

Israel started to panic, but Cassidy calmed him. There was no need to be afraid, he said—Cassidy could arrange to have Israel’s name taken off the list. Israel was now under the watch of a highly skilled assassin, Cassidy reminded him. Nichols would protect him.

By far the most important role in a long con is the “inside man”—the mark’s handler and confidant, who is also the master of ceremonies and teller of the tale. But who was Robert Booth Nichols really? He told Israel he was a “facilitator”—spookspeak for jack-of-all-trades—and that he’d been apprenticed to a tiny elite of national-security operatives called the “Chosen,” then later disowned by the CIA in the fallout from Iran-contra. But it is hard to establish much beyond the very basic contours of Nichols’s biography, since so much is shrouded in myth or blocked by the veil of national security. A 1978 FBI report identified Nichols as a professional confidence man—but one with some undefined association with intelligence agencies. He’d been licensed to manufacture the G-77 submachine gun, the report said. He claimed he’d been sent to Switzerland for three years to be taught the intricacies of intelligence-agency high finance. Nichols “should be considered armed and dangerous,” the FBI report concluded.

For months, Nichols led Israel around London, attempting to enter the shadow market through mysterious back channels. On Lombard Street, late one night, they visited Barclays bank, where Israel was given a trading desk and appeared to make millions immediately. Unbeknownst to him, Barclays was moving its headquarters from Lombard Street to Canary Wharf at the time, and the setting that night was what con artists call “the big store”—essentially a soundstage, assembled by Nichols, with just enough trappings of the real version (flickering computer screens, security guards, oak-paneled walls) to convince his mark the scam was real. (The Bayou trading floor in Connecticut was another “big store.”) But when Israel tried to collect the $942 million he thought he’d made over two weeks of late-night trading at Barclays, the counterparties vanished, and he was left with only his original investment.

Following similar “leads” to the other financial capitals of Europe—Frankfurt, Zurich, Geneva—­Israel discovered it was maddeningly difficult to trade the mythical bonds. It was also treacherous. Israel was chased through the streets of London by rival factions, he tells me, assaulted in Amsterdam, and dragged behind a vehicle in Zurich.

Along the way, Nichols gave Israel a master class in alternate world history. “The government has been keeping things from the public for years,” Israel remembers Nichols saying. “The people you think are running things—politicians, bankers, diplomats—are not even halfway up the food chain.”

“I’ve heard that there are five families that run the world,” Israel said.

“Thirteen,” corrected Nichols.

Israel reveled in the intrigue as he was ushered into the world of black ops—or what passed for black ops in Nichols’s telling. Like learning to check for a tail in the reflection in your own sunglasses, shopping at the Counter Spy Shop in London’s Mayfair, or speaking only in whispers, preferably whispered codes. Israel came to call the conspiracy “the Octopus”—the title of an unfinished book by the journalist Danny Casolaro, who died under mysterious circumstances in 1991 while investigating PROMIS. His death had been reported in Time magazine, Vanity Fair, and The Village Voice; Israel believed he’d been “suicided” by Nichols.

But the weeks continued to pass without a single trade. Nichols told Israel the market schedule was limited and the “paper” was scarce. Hoping to force some action by creating leverage, Israel wired his $150,999,847.42 back to Bayou’s Citibank account in New York. He may even have begun to doubt that Nichols could pull it off.

Then, in July, Nichols announced that he had found a tranche of bonds in Germany. Israel had to act immediately, Nichols said, if he was going to cash in on the trade with Postbank in Hamburg.

Before Israel was willing to send the money back to Europe, where Nichols could gain access to it, he insisted on meeting an official at Postbank. Following Nichols’s instructions, Israel flew to Hamburg, rendezvousing first with a man he was told was Pakistani intelligence and given a bag containing two 9-mm. Beretta handguns, each equipped with a silencer.

Nichols arrived the next morning, in full black-ops mode: Hundreds of operatives had descended on Hamburg to try to stop them from making a trade, Nichols told Israel, and urban combat was highly likely.

The meeting was scheduled for Saturday morning, a short walk from the hotel. As Israel and Nichols cautiously made their way, the streets of Hamburg seemed eerily empty. Israel and Nichols were greeted by a German banker at the rear entrance to a nondescript brown-brick building and ushered through the back door and into the lobby—completely deserted, aside from two cleaners vacuuming. In an office, the banker explained that the transaction involved $2 billion in medium-term-note prime-bank debentures. The instruments were “seasoned,” he said, meaning they’d been traded already.

To perform the final step of due diligence, Nichols borrowed a phone to call Phil Severt (also a pseudonym), who Nichols claimed was a former Reagan official and a member of the Trilateral Commission who would be responsible for the charitable component of the trade—a water-treatment facility outside Karachi. Israel had talked to Severt once before—it was a conversation that had made a strong impression on him.

“When we spoke, Severt repeatedly told me he had what he called a stupid face,” Israel recalls. “He said he had the kind of face that was instantly forgettable. He could vanish into crowds. He said he was invisible because his face was so average—so stupid.”

Severt assured the men that the Karachi initiative was in place. All that remained was for Israel to transfer $120 million to a “non-depletion” account in Postbank.

For security purposes, Israel left the meeting ahead of Nichols, walking out the back door.

“Across the street there was a man standing next to a telephone pole,” Israel remembers. “He was short, maybe five-five, wearing a turban. He appeared to be Pakistani. One of his eyes drooped down. He started to walk toward me. As I got near him, he passed by and he said—I swear to God—he said, ‘You have a really smart face.’ I stopped dead. I knew it was Severt telling me he’d sent people to watch us in Hamburg. So I threw the guy against the wall and asked what the fuck was going on. He wouldn’t talk to me, not in English. All of a sudden he could only speak Urdu. He kept saying the same thing—‘No, sahib, no, sahib.’

“I let him go. I walked a couple more steps, and then I turned around to see if Bob was behind me. As I turned, I saw the guy reach into his jacket and pull out a gun. Now Bob was coming out of the building. The guy was taking aim to shoot Bob. I pulled my Beretta out, and I shot at the guy. I hit him in the left hip. Everything was moving in slow motion. The guy dropped the gun and fell to the ground. By that time, Bob had pulled out his gun, and he plugged the guy in the right shoulder. I walked over and shot him in the head. Point-blank. Killing him. His head exploded all over the sidewalk. Blood and brains were everywhere.

“There were no cars. No witnesses. Nobody was there. The silencers worked, so the shots didn’t make any sound. No one had seen what happened. Bob grabbed me. He took the gun from my hand, and we ran for our lives. When we got back to the hotel, I didn’t know what to do. We went to Bob’s room. I was crying. I was devastated. I threw up. Bob said I was the craziest person he’d ever met. But I’d saved his life. He told me he’d take care of it. Bob started to make calls. He got rid of the body. He had cleaners to take care of that kind of thing—to make a body disappear before the police were alerted. He got rid of the guns too. He made it so there were no traces of the crime.”

The next business day, Israel wired $120 million to Germany.

Had Israel really killed a man? Or was it a piece of theater choreographed by Nichols? Staging a murder is one of the oldest ruses of the grift—a ploy that provided the finale for The Sting, the movie inspired by the classic book The Big Con. Blood, guts, guns, the frisson of extreme danger, the need to flee before the law arrives—the elements are eternal. Cackle-bladder is the term of art for the sack filled with chicken blood a fraudster would conceal in his mouth until the precise moment for a sudden bite down. The exploding turban was an amazing new twist on an old scam, it seemed.

For all his emotional investment in the shadow market, Israel’s money had been sitting back in New York, and Nichols had apparently concluded that Israel needed a “convincer”: an event to eliminate any lingering doubts, to prove that everything he said was true. Nichols wanted Israel to see that the Octopus was real. Terrifyingly real.

Even today, seven years later, Israel continues to believe—the best possible outcome for a long con, as any scam artist will tell you. Israel’s multimillion-dollar wires to and from Europe eventually triggered law-enforcement interest in Bayou, and he turned himself in when a frozen bank account stopped him from paying out an investor’s large withdrawal. But waiting out the twenty-year fraud sentence he considers excessive, Israel continues to believe he’s gotten away with murder.

As a teenager, Israel had once walked into a deli in Manhattan immediately after an armed robbery and seen the shop owner lying on the floor after being shot in the head. The scene in Hamburg was just as real, he says—just as vivid.

“Bob controlled me from the first day we met,” Israel tells me. “But not in this way. There was no chance he faked it on me. It wasn’t a Hollywood setup. This was the real thing.”

This article originally appeared on NYMag.