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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 truththe 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 auditfirst 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 secondsor 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 botherthe 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 hima 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 timeon my shoulders, my heart, my mind. I was always surrounded by blackness.

He was desperate to fill the holeto 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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