April 26, 2024 • 42 mins
Sam Israel had a problem. The investors in his hedge fund, Bayou Capital, were expecting spectacular returns. Sam himself had spent years proclaiming the fund's brilliant results. In reality, Sam had been marking his own homework, publishing fraudulent accounts and using these to lure in new investors.
What to do? Well, the logical thing of course: wait around for an extraordinary profitable streak, and in the meantime keep up the ruse...
We're bringing you an episode of Cautionary Tales with Tim Harford. This episode was recorded live at the Bristol Festival of Economics and studies three incredible investment scams. How do pyramid and ponzi schemes snowball out of control, flattening victim and fraudster alike?
For a full list of sources, see the show notes at timharford.com.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:14):
Pushkin, Do you know your Ponzi schemes from your pyramid schemes?
The following episode digs into the pitfalls of get rich
Quick scams. It was recorded in front of a live
audience at the Bristol Festival of Economics. Gosh, well, are
(01:01):
you already excellent? Okay, so we will begin. Sophie and
Julia were relaxing on the riverside terrace of a fancy
(01:21):
London spa, two rich girls joined by an even richer one, Tatiana,
the glamorous wife of an investment banker. Tatiana ordered another
bottle of champagne and launched into her sales pitch.
Speaker 2 (01:38):
You simply must buy our heart.
Speaker 1 (01:41):
Julia and Sophie looked at each other and sighed. This
wasn't the first time they had heard the spiel. It
was the summer of two thousand and three, and hearts
with a capital H were all the rage among the
champagne drinking, horse riding banker marrying ladies of Great Britain.
(02:02):
Here's how it worked. You donated three thousand pounds to
buy a heart and join the scheme at the bottom
of a pyramid. That's about six thousand dollars in today's money,
Your money would go to the person at the top,
called the receiver. They'd leave the pyramid. The two people
(02:24):
on the next level down would be promoted to the
top roll of receiver. In fact, the pyramid would then
split into two, so that both of them would be
at the top of their own pyramid. Everyone would move
up a level, and everyone on the lowest layer, including you,
would recruit two people to buy a heart and fill
(02:46):
in the newly vacant layer beneath you. Six weeks later,
you would be a receiver and would get twenty four
thousand pounds, the equivalent of fifty thousand dollars today, and
a huge return. No matter how you measured it, the
(03:06):
money just grew like a snowball rolling downhill until it
became an avalanche. If you're not halfway through your second
bottle of lunchtime champagne, you can probably spot the problem here.
(03:27):
This is transparently a pyramid scheme, and pyramid schemes don't
make money, they just move it around. If someone's going
to make twenty four thousand pounds, then that money must
come from other members, so eight other people must lose
their investment of three thousand pounds. It's really that simple.
(03:50):
In order to persuade people to join a pyramid scheme,
there's often some sort of story designed to obscure this
implacable arithmetic. This one about buying a heart was marketed
as feminism. The whole project was called Women in Empowering Women.
(04:11):
Men weren't allowed.
Speaker 3 (04:13):
Men are more corruptible. They can't be.
Speaker 1 (04:15):
Trusted, as Tatiana explained. She also added that she had
spent her first wind fall on a little intimate plastic
surgery that she preferred not to discuss with her husband.
Julia and Sophie were tempted, as Julia later recalled in
an article for the Mail on Sunday newspaper. Then Tatiana
(04:39):
whispered that apparently the supermodel Claudias Schieffer had been spotted
at a women Empowering Women party at a mansion in
central London. That was the clincher sign me up, said Julia.
Things moved quickly. The next day, Julia received a phone
(05:01):
call from a lady called Elfie, who was collecting her
boy Archie from an exclusive London school.
Speaker 2 (05:09):
Darling, I must be quick, but I couldn't wait to
tell you the news. You've already moved up a line.
You're one step closer to becoming a receiver.
Speaker 1 (05:21):
Wonderful, replied Julia.
Speaker 2 (05:23):
So now you must send me three thousand pounds.
Speaker 1 (05:30):
I'm Tim Harford and you're listening to Cautionary Tales live
at the Bristol Festival of Economics. This is a cautionary
tale about investment scams and about the way that they
(05:52):
snowball out of control, often flattening not only the victims
but the fraudster too. Some of those fraudsters are anonymous figures. Julia,
Sophie and even Tatiana had no idea who set up
women empowering women, but some of them are not. Few
(06:12):
people are less anonymous than Samuel Israel, the Third. Let's
call him Sam Israel for short. Sam came from a
wealthy family of commodity traders in New Orleans, but was
determined to make his own way in life. He started
at the bottom in nineteen seventy eight, dropping out of
(06:34):
college to run errands for one of Wall Street's most
famous share traders. Sometimes those errands merely meant fetching pizza.
Sometimes they involved going to a particular room in the
Pierre Hotel on the Upper east Side and speaking a
code phrase to a Swiss gentleman.
Speaker 3 (06:55):
The weather is nice for this time of year, yes, but.
Speaker 1 (07:00):
Today it looks like rain. The Swiss man gave Sam
a satchel. Sam didn't look inside it until his boss
showed him that it was filled with one hundred dollar bills,
well over one hundred thousand dollars at a time when
one hundred thousand dollars was real money. Odd things like
(07:23):
this tended to happen from time to time, and through
it all, Sam Israel watched and learned and kept his
mouth shut, and he began to thrive on Wall Street.
Sam married a childhood sweetheart, an ice girl called Janis.
She was sensible, training to be an accountant. It wasn't
(07:46):
the ideal match.
Speaker 3 (07:48):
I hid everything from Janis.
Speaker 1 (07:50):
Sam Israel confessed to the Rolling Stone journalist Gee Lawson.
Speaker 4 (07:55):
I have been hiding things from her since we were kids.
She was the responsible worker. I was the fuck up.
I smoked weed and snorted cook. I couldn't talk to
her about what was really going on because I couldn't
confide in her.
Speaker 1 (08:09):
And what was really going on that depends on when
you asked the question. In nineteen seventy eight, Sam was
quietly being a courier of satchels full one hundred dollar bills.
The night before he married Janis, Sam was having a
threesome with two expensive call girls, paid for by his
(08:30):
Wall Street trader boss as a wedding gift. In nineteen
eighty seven, Sam was making a small fortune by fortuitously
betting that the market would fall just before the largest
one day crash in Wall Street history. Sam always swore
he could have made more if the Federal Reserve hadn't
(08:50):
swooped in printing money to prop up the market. In
the early nineteen nineties, Sam was winning and losing huge
sums several times over by trading on insider tips, some
good and some bad. Sam couldn't talk to Janis about
any of this, of course. But what Sam really couldn't
(09:14):
talk to Janus about was by you capital, By you
capital was well, it was a con. But let's come
back to that. Let's talk about a simpler con first.
An early example, if you like, of women empowering women.
(09:35):
In eighteen seventy eight, refined ladies of Boston, Massachusetts, were
intrigued to hear of a wonderful investment opportunity. A new bank,
founded by women for women and called the Ladies Deposit Company,
paid interest of eight percent. Eight percent a year would
(09:59):
be a solid enough offering. The Ladi's Deposit Company, however,
paid eight percent every month, deposit one hundred, and by
the end of the year you'd have earned ninety six dollars,
nearly doubling your original investment. There were no rumors of
supermodels back in eighteen seventy eight, but the gossip suggested
(10:23):
something even more reassuring. The Ladies Deposit Company was said
to be backed by a Quaker charity doing many unspecified
good works. Only unmarried women need apply. Such unprotected women
(10:44):
who lacked the security of a husband's income were in
a precarious position. Either they were poor and trying to
earn a wage in a world where women were barred
from well paid jobs, or they were of a social
background where they were expected to live off an inheritance.
The investment return on that inheritance, then was a matter
(11:06):
of huge importance, and eight percent a month too good
to miss, or alternatively, too good to be true. The
Ladies Deposit Company was not founded by Quakers, but by
a stage psychic and professional fortune teller named as Sarah Howe.
(11:28):
The company had some similarities with a pyramid scheme like
the Hearts of Women Empowering Women, but also some differences.
The grim arithmetic of the scheme was concealed. Money poured
into the Lady's Deposit Company, money poured out, and the
mechanics of how it all worked were conveniently obscure. One
(11:53):
intrepid reporter even disguised himself as a woman one can
only presume that no female journalists were available in order
to gain entry to the Deposit Company's headquarters, but he
didn't learn much.
Speaker 2 (12:09):
We never disclose the methods by which we do business,
was all.
Speaker 1 (12:14):
That the company's employees would say. Sarah Howe had established
what we'd now call a Ponzi scheme, named after Charles Ponzi,
a flamboyant Bostonian whose own cover story was something to
do with international postage coupons. Sarah Howe had the same
basic idea in the same city nearly fifty years earlier.
(12:40):
But women never seem to get the credit for inventing anything,
even investment fraud. The local press soon concluded that the
Ladies Deposit Company was an obvious scam, The Boston Daily
Advertiser published an illustrated explainer, some articles highlighting the stage
(13:00):
psychic hows, rather questionable qualifications, and a prediction that the
whole thing would collapse in short or. In the face
of this negative publicity and some twitchy depositors, Sarah Howe
decided that the best way forward was bluff. She announced
(13:22):
that anyone who wanted their money back with interest in full,
could have it immediately. She hoped that the ladies of
Boston would be so reassured by this offer that they
wouldn't take it up. Alas, the ladies of Boston were
not reassured at all. They asked for their money back,
and when Sarah Howe didn't have it, she went to jail.
(13:47):
The Lady's Deposit Company is a wonderful illustration of what
Dan Davies in his book Lying for Money, calls the
snowball effect. These scams need to suck in an ever
growing number of dupes to keep going, and eventually that
snowball of money rolling downhill, becoming bigger and bigger, simply
(14:11):
falls apart. It's too big. Remember, Sarah Howe was offering
to almost double your money in a year if you
invested with her. So let's watch the snowball from a
safe distance. Imagine that Sarah receives an investment of one
(14:32):
hundred dollars from a little old lady and steals it.
By the end of the year, that little old lady
expects her one hundred dollars back on top of ninety
six dollars in interest. So Sarah finds two more investors,
steals their money, and gives it to the little old lady.
(14:52):
But by the end of the following year, Sarah Howe
needs to have given nearly two hundred dollars to both
of her investors. To do that, she needs four new investors,
who shouldn't be hard to find if they think they're
going to double their money. When the four new investors
want a total of eight hundred dollars back, she just
(15:13):
needs to find eight new investors to join the Lady's
Deposit Company. Now you can see the trap here. Eventually
there will be no more lady depositors for the Lady's
Deposit Company. But what's perhaps less immediately obvious is that
in this little story, Sarah Howe will soon owe sixteen
(15:36):
hundred dollars to eight investors, and yet she only ever
stole one hundred dollars for herself. The growing snowball of
fraud is huge, and it needs to keep getting huger.
The profit for the fraudster is relatively tiny. No wonder
that so many fraudsters eventually get caught, and no wonder
(16:00):
perhaps that when they do get caught, so many of
them weep with relief. There will be tears a plenty,
but not much relief.
Speaker 3 (16:13):
After the break.
Speaker 1 (16:34):
In the summer of two thousand and three, Julia started
to try to recruit investors to buy hearts for women,
empowering women. Julia had been signed up by Tatiana, the
banker's wife, over champagne at the Spa. She'd sent three
thousand pounds to Elphie, the mother of Darling Archie from
the Fancy School, but Julia's own recruitment efforts were going nowhere.
(16:59):
Her rich friends sneered at her that had already been
approached so many times to invest in a heart that
the whole affair had become a bore ring joke. Horror
friends were less likely to have heard about the scheme,
but they were also less likely to have the money
to invest. I mentioned that as a matter of simple arithmetic,
(17:24):
For everyone who makes twenty four thousand pounds in a
pyramid scheme, there must be eight people who lose three
thousand pounds. But how can it be that so many
people lose out? Well, that's simple too. Every time a
new group of recruits is brought in, the entire operation
has to double in size. Every recruit finds two more recruits,
(17:47):
and every pyramid becomes two pyramids. The rolling snowball becomes
a vast snow boulder, then collapses into a destructive avalanche
of disappointment and loss. Pyramid schemes fail because they run
out of recruits just after becoming huge, when a vast
(18:10):
number of people have recently joined but not yet cashed out.
Julia was one of those people. In growing desperation, Julia
went to a recruitment party in the hope of recruiting
new investors. She'd been told to tales about parties in
(18:31):
central London mansions, champagne being quaffed with supermodels as suitcases
of cash were handed to people who'd reached the top
of the pyramid. That this recruitment party was in a
hairdressers instead of champagne. On ice, there was warm white wine,
(18:52):
and a growing sense of irritation that Julia's failure to
recruit was letting down everyone above her in the pyramid.
There was, of course, no sign of Claudia Schieffer. The
brilliance of women empowering women is that it seems to
(19:13):
have been largely self organizing. Many scams, in contrast, require
a lot of hard work. Just ask Sam Israel. He
set up his ill fated hedge fund by you Capital
in nineteen ninety six, assisted by an accountant named Dan Marino,
(19:34):
who lived with his mother and dreamed of greatness. Apparently,
Sam actually intended to run an honest hedge fund, or
if not quite honest, a hedge fund that would make
money for investors. His business plan, by You Capital would
use a new computer algorithm he'd developed, plus the skills
(19:58):
of a once great trader whom Sam had hired after
he had fallen on hard times, plus a few insider
tips like in the old days when he'd collect bag
of cash from the Pierre Hotel. That should do the trick,
thought Sam. But it didn't. The once great trader was
(20:18):
washed up. He made a lot of bad calls. The
computer algorithm seemed to misfire as often as it worked,
and Sam didn't have the same insider access that he
used to. After a couple of lackluster years in which
Sam loudly told his few investors that the fund's results
(20:38):
were great, he pondered his options. The results were not
in fact great, and if he simply published the firm's
accounts showing a loss, the investors would yell at him
for all his empty boasts, and Bayou Capital would collapse.
Or alternatively, Sam and his colleagues, the washed up trader
(21:03):
and the accountant who lived with his mum, could lie,
could publish audited accounts which claimed stella results. Like Sarah Howe,
they'd be offering fantastic returns. Unlike Sarah Howe, who would
simply steal money from new depositors and pay it out
(21:24):
as interest, they'd need to show some kind of evidence
that they were making profitable investments. To do that, they'd
need a fraudulent auditor. No problem. Dan Marino simply set
up his own audit firm, marking his own homework. Nobody
(21:45):
ever checked that the auditor who was verifying that Dan
Marino was telling the truth was.
Speaker 3 (21:50):
A Dan Marino.
Speaker 1 (21:53):
It probably didn't hurt that if anyone ever tried to
search for Dan Marino on the still young worldwide Web,
they were sure to get Dan Marino, the unimaginably famous
Miami Dolphins quarterback, rather than Dan Marino the crooked accountant.
(22:14):
For a while, the plan was that Sam would go
on a profitable streak and actually make the profits that
Dan Marino's fake accounts were claiming. But the snowball was
starting to grow. The more profit they said they were making,
the larger the fictional pot of money was growing, and
(22:34):
the harder it was for Sam and his partner to
catch up to their own lies. It didn't help that
Sam kept claiming to outperform the market. Dan Marino was
losing his mind at the fact that Sam couldn't control himself.
Speaker 3 (22:51):
When they had a good month and made money, they
used that as the performance number.
Speaker 1 (22:55):
Complained Dan to the journalist Gee Lawson.
Speaker 3 (22:57):
When they had a bad month, they used a made
up number.
Speaker 1 (23:01):
That won't work. If you let the fraud snowball grow
too big, you'll never get it under control. Sam is
Israel would never be able to catch up to his
own lies because he could never bring himself to pretend
he'd had a bad quarter when it had a good one.
Speaker 3 (23:17):
We went with grace and luls with integrity.
Speaker 1 (23:20):
Boasted Sam to his investors. Dan Marino knew the awful truth.
Speaker 3 (23:26):
I stopped tracking the published numbers against the real numbers.
Speaker 1 (23:29):
Said Marino. The snowball was already too big.
Speaker 3 (23:33):
Oh, it made me sick to my stomach.
Speaker 1 (23:37):
Four years after, the Ladies Deposit Company was exposed by
the Boston Daily Advertiser and collapsed, and Miss Sarah Howe
was sent to prison. Refined women of Boston, Massachusetts, were
intrigued to hear of a wonderful investment opportunity. A new bank,
founded for women by women and called the Boston Women's Bank,
(24:03):
paid interest of seven percent per month. Too good to miss,
or alternatively, too good to be true. After a couple
of years, the Boston Daily Advertiser discovered and published the truth.
The manager of the Boston Women's Bank was not missus J. C. Ewle,
(24:29):
as advertised, but an ex convict by the name of
Sarah Howe. Sarah Howe had learned one lesson this time.
She skipped town and moved to Chicago. In due course,
the refined Ladies of Chicago, we're intrigued to hear of
(24:53):
a wonderful investment opportunity The Lady's Provident Aid Society was
offering interest of Oh never mind, the police caught up
with Miss Sarah Howe shut down the Lady's Provident Aid Society,
and so enough as Howe was back in prison. Worth
it surely not in character, most definitely, Sometimes when the
(25:21):
snowball starts to roll, the fraudster just can't quit. Sam
Israel seemed to have it all, a loving wife and children,
a luxurious home, and at least on paper, a fortune
to his name. But appearances can be deceptive. Sam was
(25:42):
a mess. He was taking too much cocaine and drinking
far too much booze, and like so many people, he
had become addicted to painkillers after a back injury. All
the while, the fraud snowball was growing. But Sam and
Dan had one advantage, which is that a fraudulent hedge
(26:02):
fund doesn't have a cell by date. That's different from
the other scams we've heard about. Taty I was promising
Julia that women empowering women would multiply her money in
just six weeks. The Ladies Deposit Company promised to almost
double investors' money after a year. But by you capital
(26:23):
was different because hedge fund investors didn't tend to withdraw
their money if things seemed to be going well. Instead,
they sat back and watched the snowball grow. But the
more by you capital snowball grew, the harder it would
ever be for Sam Israel to trade his way out
(26:45):
of the lie. One September Friday, his computer algorithm suggested
a big bet on shares going up in the next week.
Sam made that bet. The following Tuesday morning, two airliners
swept out of the cloudless sky above Manhattan and crashed
(27:07):
into the World Trade Center. The world reeled with the
implications of the atrocity, but for Sam Israel and Dan Marino,
the only thing that mattered was how it changed their
own twisted financial world. Sam was aghast that his bet
had spectacularly backfired, while Dan Marino spotted an opportunity close
(27:33):
the fund. Said Dan Marino and ten investors, he lost
most of their money in the aftermath of nine to eleven,
and give the dregs back. Everyone will yell, but nobody
will suspect anything, and neither you nor I will go
to jail. Please speG Marino, but sam Israel wouldn't do it.
He knew that if by you capital folded, he might
(27:56):
escape jail, but it'd still lose his fancy home. He
should have listened to Marino, because within two years he
was going to lose his home anyway. Cautionary tales, We'll
be back in a moment. In two thousand and three,
(28:37):
Sam Israel was at home leaning over a line of
white powder with a rolled twenty dollar bill up his nose.
When his wife Janice walked in. She became upset. He
became outraged. How dare she suggests he was taking cocaine.
She persuaded him to take urine tests to ensure he
(28:59):
stayed off the drugs until one evening he angrily unzipped
his pants and went all over the bathroom floor, bellowing.
Speaker 3 (29:08):
You want yourn.
Speaker 1 (29:10):
At Thanksgiving that year, he passed out over the turkey.
Speaker 3 (29:15):
Oh.
Speaker 1 (29:19):
By Christmas two thousand and three, Janis had thrown him
out of their house and secured a protective order. Sam
rented the most tasteless, ostentatious bachelor pad he could find,
a vast Tudor style manner with outsized chandeliers, marble bathrooms
(29:40):
and comically huge beds. Sam paid the monthly rent of
twenty two thousand dollars to the house's owner, a gentleman
by the name of Donald Trump.
Speaker 4 (29:53):
So good, so good, amazing house, huge beds.
Speaker 1 (30:00):
Sam hung around clubs, tipping the bartender to introduce him
to pretty women. He fitted the Trump mansion with the
latest trading A seventeen screens so he could work from home.
He was still looking for a way to make all
the money back, but the fraud snowball that Bayou was
getting bigger and bigger, and Dan Marino had had a
(30:22):
couple of near misses when investors or regulators had asked
to see documents that would prove highly incriminating. Marino was
reduced to sending those incriminating documents to counterparties on a
Friday evening in the hope that they would be tossed
into a backlog file and then buried under the Monday
morning rush. Amazingly, that tactic worked, but it couldn't work forever.
(30:47):
Dan and Sam were going to jail for sure unless
Sam Israel could find a sure fire scheme to make
How big was the snowball? Now there were several hundred
million dollars. Sam Israel was starting to get desperate. There's
(31:08):
an old saying, you can't cheat an honest man, and
there's truth in that saying, because the premise of a
scam is often simply.
Speaker 3 (31:18):
I'm doing crimes, and if you come and do crimes
with me, we'll both make money.
Speaker 1 (31:24):
That's a sales pitch to drive away honest folk, but
it also has some appeal because it provides a logical
reason why there might be quick money to be made
for someone who could keep a secret. Sam Israel was
not an honest man. He'd seen enough cheating on Wall
Street to know that the game was often fixed, and
(31:46):
the crazy simplicity of the Bayou fraud, coupled perhaps with
the fact that Sam was taking a lot of drugs,
was just starting to make him doubt everything. How many
other hedge funds were just Ponzi schemes? What else was
a Ponzi scheme? He had seen the Federal Reserve magic
(32:06):
money out of thin air after that great crash of
nineteen eighty seven, when Sam had made so much money
and could have made more if the FED hadn't stepped in.
The FED stepped in after nine to eleven, too.
Speaker 3 (32:18):
Who exactly was running the world economy.
Speaker 1 (32:20):
Anyway, Sam started to run in strange conspiratorial circles. If
you want the full story, it's told in incredible cringe
making detail in Gee Lawson's book Octopus, which describes an
astonishing cast of characters and an even more astonishing array
(32:42):
of delusional beliefs. Sam became obsessed with finding the undoctored
footage showing who really killed JFK. He believed he had
been attacked by an assassin on the streets of Hamburg,
and that had blown the man's brains out in self defense.
Needless to say, Hamburg's police have no record at all
(33:04):
of such events. Above all, Sam came to believe in
a global conspiracy thirteen powerful families who truly ruled the world,
whom he called the Octopus. It all gets very, very
weird that do read the book. It's quite a trip.
(33:26):
But for our purposes, what we need to know is
that Sam Israel fell under the spell of a man
called Robert Booth Nichols, who was claimed to be a
top CIA agent, whose bare hands were said to be
deadly weapons, and who was undoubtedly a confidence trickster, like
(33:46):
an aging chain smoking James Bond. He swaggered around London
City with tight controls on firearms with a revolver in
a shoulder holster. Sam believed that Nichols had access to
a special CIA program which monitored every bank transaction on
the planet, an insider trader's dream, and he flew out
(34:09):
to London to beg Nichols to give it to him.
He'd do anything, he said. Do you have one hundred
million dollars in cash? Said Nichols.
Speaker 3 (34:18):
I do. I've got one hundred million in cash.
Speaker 1 (34:22):
Do you have one hundred and fifty million?
Speaker 3 (34:25):
Yes.
Speaker 1 (34:27):
Forget the special CIA program which monitors bank accounts, said Nichols.
We can make some real money together if we can
access a special secret market operated by the thirteen families
who together secretly rule the world. You know the octopus.
And just as Julia had said to Tatiana at the
(34:49):
Riverside spa, Sam Israel said to Nichols, sign me up,
but not for three thousand pounds, for more than one
hundred million dollars. With Nichols by his side whispering into
his ear, Sam Israel joined an absolutely bizarre world full
(35:12):
of conspiracy, theorist, fraudstans, all claiming to believe in the
existence of a secret market that can multiply your money
tenfold overnight, all secretly frustrated that they personally have never
been able to get access to that entirely fictional market,
and all trying to rip each other off. At one stage,
(35:34):
Nichols got sam Israel to give him ten million dollars
in cash on the basis of a story about a
stash of treasure stolen and hidden by a Japanese general
in the Second World War and protected by poison gas
booby traps. Then another con man persuaded Nichols to give
him a million dollars to help the finance an expedition
(35:57):
to find the exact same treasure. Can we have a recap?
Speaker 2 (36:02):
Of course, sam Israel was controlling one hundred million dollars
of Buy You Capital's money based on a fraud, invested
that money in Robert Nichols's fraud. Robert Nichols then invested
that money in yet another fraud.
Speaker 1 (36:16):
Exactly thank you, are you? Surely, though, it's quite hard
to give one hundred million dollars to a fraudster to
invest in a special market protected by assassins and controlled
by the thirteen families who really rule the world. There
are hard checks and balances in place. Several times Sam
Israel tried to invest the one hundred million in one
(36:38):
scam or another, and a banker or a stockbroker simply
refused to process the transaction until there was proof that
it was genuine, and there never was. In the end,
the Bayou Capital ponzi scheme was exposed. But it wasn't
because sam Israel's investors believed that he'd lost his mind,
(37:00):
or even that he had lost their money. They just
believed that he'd lost his touch. They noticed that sam
wasn't spending much time at work. Little did they know
that this was because he was in Europe being taught
how to kill a person with his bare hands by
a manly believed was an elite CIA operative. Bayou's investors
(37:23):
asked for their money back, which would have been fine,
except that most of that money had only ever existed
in Dan Marino's fraudulent accounts. The snowball had grown enormous.
The fraud was at last exposed. Sam Israel was given
a sentence of twenty years, and, as an act of
(37:46):
leniency that seems to be common for white collar criminals
eight weeks of freedom to get his affairs in order
before reporting to jail. Listener, he did not report to jail.
Police found his car parked on the Bear Mountain Bridge
(38:07):
high over the Hudson River in upstate New York. He
left a suicide note and smudged in the dust on
his car's hood were the words suicide is painless. But
Sam Israel's suicide note was as fictional as his investment returns.
The authorities tracked him down alive and well and a
(38:29):
campsite in Massachusetts. They promptly sent him to jail. By
faking his own suicide, He got just three more weeks
of freedom, and of course landed his girlfriend in trouble
for helping him out. Worth it surely not in character.
Most definitely, Julia's investment troubles, thankfully, were rather more mundane.
(38:56):
Having invested three thousand pounds in the women Empowering Women pyramid,
she found herself fielding ever more strident calls from people
further up the pyramid, berating her not finding more recruits. Tricksy,
Pucky and Buttons all had their say. It was, says Julia,
(39:17):
like being bullied by a bunch of fairies. But the
curious thing about women empowering women nobody knows who started it.
We think that it's hard to be sure. That most
ponsi schemes fail. When they do, it's because of the
relentless logic of the snowball. Sarah Howe went to prison twice.
(39:40):
Sam Israel faked his own suicide in a desperate attempt
to escape. But the unknown woman who created the whole
spiel about hearts and empowering other women, she's the exception
to the rule that fraud doesn't pay. She pushed a
few snowballs down a steep snowy hill, decided that she'd
(40:05):
made enough money, and before the casualties began to mount
down below, she walked away. But those casualties did exist,
and Julia met them. The grumpy fairies could probably afford
to lose the money, but it was less funny to
receive voicemails from distraught Filipino cleaners who'd bought hearts and
(40:30):
now feared they'd lose three thousand pounds they definitely could
not afford to squander, having run out of spa going
pony riding ladies who lunch the women empowering women snowball
had started to flatten much poorer women, women who would
struggle to pick themselves up after the snowball had rolled on.
(40:57):
Key sources for this episode include Julia Stevenson's article Broken
Hearts Club, Daniel Davis's book Lying for Money, and for
the astonishing story of Sam Israel Gee Larson's book Octopus.
This live edition of Cautionary Tales was written by me
Tim Harford with Andrew Wright. Tonight you heard the voice
(41:21):
talents of Sarah Job and Stuart mclachlarning. The original music
is the work for Pascal Wise. Our b s cl
interpreter was Katherine Motson. The show was produced by Alice Fines,
Marilyn Rusk and Ryan Dilling. Sarah Nick said it took
the script. A sound engineer was Andrew Baylis. The thanks
(41:41):
to Zury Sedmand Milm and the team at the British
Best Level of Economics. Portional Tales is a production of
Pushkin Industries. If you like the show, please remember to rate,
share and review. Wanted to hear the show a free
sign up for Pushkin Class on the show page of
Apple Podcasts of Pushkin FM, slash Truce. Thank you that
(42:10):
was fun, Thank you so much.
Speaker 2 (42:12):
Guys.
Speaker 1 (42:14):
A Trump impression was okay, wasn't it.
Pushkin, Do you know your Ponzi schemes from your pyramid schemes?
The following episode digs into the pitfalls of get rich
Quick scams. It was recorded in front of a live
audience at the Bristol Festival of Economics. Gosh, well, are
(01:01):
you already excellent? Okay, so we will begin. Sophie and
Julia were relaxing on the riverside terrace of a fancy
(01:21):
London spa, two rich girls joined by an even richer one, Tatiana,
the glamorous wife of an investment banker. Tatiana ordered another
bottle of champagne and launched into her sales pitch.
Speaker 2 (01:38):
You simply must buy our heart.
Speaker 1 (01:41):
Julia and Sophie looked at each other and sighed. This
wasn't the first time they had heard the spiel. It
was the summer of two thousand and three, and hearts
with a capital H were all the rage among the
champagne drinking, horse riding banker marrying ladies of Great Britain.
(02:02):
Here's how it worked. You donated three thousand pounds to
buy a heart and join the scheme at the bottom
of a pyramid. That's about six thousand dollars in today's money,
Your money would go to the person at the top,
called the receiver. They'd leave the pyramid. The two people
(02:24):
on the next level down would be promoted to the
top roll of receiver. In fact, the pyramid would then
split into two, so that both of them would be
at the top of their own pyramid. Everyone would move
up a level, and everyone on the lowest layer, including you,
would recruit two people to buy a heart and fill
(02:46):
in the newly vacant layer beneath you. Six weeks later,
you would be a receiver and would get twenty four
thousand pounds, the equivalent of fifty thousand dollars today, and
a huge return. No matter how you measured it, the
(03:06):
money just grew like a snowball rolling downhill until it
became an avalanche. If you're not halfway through your second
bottle of lunchtime champagne, you can probably spot the problem here.
(03:27):
This is transparently a pyramid scheme, and pyramid schemes don't
make money, they just move it around. If someone's going
to make twenty four thousand pounds, then that money must
come from other members, so eight other people must lose
their investment of three thousand pounds. It's really that simple.
(03:50):
In order to persuade people to join a pyramid scheme,
there's often some sort of story designed to obscure this
implacable arithmetic. This one about buying a heart was marketed
as feminism. The whole project was called Women in Empowering Women.
(04:11):
Men weren't allowed.
Speaker 3 (04:13):
Men are more corruptible. They can't be.
Speaker 1 (04:15):
Trusted, as Tatiana explained. She also added that she had
spent her first wind fall on a little intimate plastic
surgery that she preferred not to discuss with her husband.
Julia and Sophie were tempted, as Julia later recalled in
an article for the Mail on Sunday newspaper. Then Tatiana
(04:39):
whispered that apparently the supermodel Claudias Schieffer had been spotted
at a women Empowering Women party at a mansion in
central London. That was the clincher sign me up, said Julia.
Things moved quickly. The next day, Julia received a phone
(05:01):
call from a lady called Elfie, who was collecting her
boy Archie from an exclusive London school.
Speaker 2 (05:09):
Darling, I must be quick, but I couldn't wait to
tell you the news. You've already moved up a line.
You're one step closer to becoming a receiver.
Speaker 1 (05:21):
Wonderful, replied Julia.
Speaker 2 (05:23):
So now you must send me three thousand pounds.
Speaker 1 (05:30):
I'm Tim Harford and you're listening to Cautionary Tales live
at the Bristol Festival of Economics. This is a cautionary
tale about investment scams and about the way that they
(05:52):
snowball out of control, often flattening not only the victims
but the fraudster too. Some of those fraudsters are anonymous figures. Julia,
Sophie and even Tatiana had no idea who set up
women empowering women, but some of them are not. Few
(06:12):
people are less anonymous than Samuel Israel, the Third. Let's
call him Sam Israel for short. Sam came from a
wealthy family of commodity traders in New Orleans, but was
determined to make his own way in life. He started
at the bottom in nineteen seventy eight, dropping out of
(06:34):
college to run errands for one of Wall Street's most
famous share traders. Sometimes those errands merely meant fetching pizza.
Sometimes they involved going to a particular room in the
Pierre Hotel on the Upper east Side and speaking a
code phrase to a Swiss gentleman.
Speaker 3 (06:55):
The weather is nice for this time of year, yes, but.
Speaker 1 (07:00):
Today it looks like rain. The Swiss man gave Sam
a satchel. Sam didn't look inside it until his boss
showed him that it was filled with one hundred dollar bills,
well over one hundred thousand dollars at a time when
one hundred thousand dollars was real money. Odd things like
(07:23):
this tended to happen from time to time, and through
it all, Sam Israel watched and learned and kept his
mouth shut, and he began to thrive on Wall Street.
Sam married a childhood sweetheart, an ice girl called Janis.
She was sensible, training to be an accountant. It wasn't
(07:46):
the ideal match.
Speaker 3 (07:48):
I hid everything from Janis.
Speaker 1 (07:50):
Sam Israel confessed to the Rolling Stone journalist Gee Lawson.
Speaker 4 (07:55):
I have been hiding things from her since we were kids.
She was the responsible worker. I was the fuck up.
I smoked weed and snorted cook. I couldn't talk to
her about what was really going on because I couldn't
confide in her.
Speaker 1 (08:09):
And what was really going on that depends on when
you asked the question. In nineteen seventy eight, Sam was
quietly being a courier of satchels full one hundred dollar bills.
The night before he married Janis, Sam was having a
threesome with two expensive call girls, paid for by his
(08:30):
Wall Street trader boss as a wedding gift. In nineteen
eighty seven, Sam was making a small fortune by fortuitously
betting that the market would fall just before the largest
one day crash in Wall Street history. Sam always swore
he could have made more if the Federal Reserve hadn't
(08:50):
swooped in printing money to prop up the market. In
the early nineteen nineties, Sam was winning and losing huge
sums several times over by trading on insider tips, some
good and some bad. Sam couldn't talk to Janis about
any of this, of course. But what Sam really couldn't
(09:14):
talk to Janus about was by you capital, By you
capital was well, it was a con. But let's come
back to that. Let's talk about a simpler con first.
An early example, if you like, of women empowering women.
(09:35):
In eighteen seventy eight, refined ladies of Boston, Massachusetts, were
intrigued to hear of a wonderful investment opportunity. A new bank,
founded by women for women and called the Ladies Deposit Company,
paid interest of eight percent. Eight percent a year would
(09:59):
be a solid enough offering. The Ladi's Deposit Company, however,
paid eight percent every month, deposit one hundred, and by
the end of the year you'd have earned ninety six dollars,
nearly doubling your original investment. There were no rumors of
supermodels back in eighteen seventy eight, but the gossip suggested
(10:23):
something even more reassuring. The Ladies Deposit Company was said
to be backed by a Quaker charity doing many unspecified
good works. Only unmarried women need apply. Such unprotected women
(10:44):
who lacked the security of a husband's income were in
a precarious position. Either they were poor and trying to
earn a wage in a world where women were barred
from well paid jobs, or they were of a social
background where they were expected to live off an inheritance.
The investment return on that inheritance, then was a matter
(11:06):
of huge importance, and eight percent a month too good
to miss, or alternatively, too good to be true. The
Ladies Deposit Company was not founded by Quakers, but by
a stage psychic and professional fortune teller named as Sarah Howe.
(11:28):
The company had some similarities with a pyramid scheme like
the Hearts of Women Empowering Women, but also some differences.
The grim arithmetic of the scheme was concealed. Money poured
into the Lady's Deposit Company, money poured out, and the
mechanics of how it all worked were conveniently obscure. One
(11:53):
intrepid reporter even disguised himself as a woman one can
only presume that no female journalists were available in order
to gain entry to the Deposit Company's headquarters, but he
didn't learn much.
Speaker 2 (12:09):
We never disclose the methods by which we do business,
was all.
Speaker 1 (12:14):
That the company's employees would say. Sarah Howe had established
what we'd now call a Ponzi scheme, named after Charles Ponzi,
a flamboyant Bostonian whose own cover story was something to
do with international postage coupons. Sarah Howe had the same
basic idea in the same city nearly fifty years earlier.
(12:40):
But women never seem to get the credit for inventing anything,
even investment fraud. The local press soon concluded that the
Ladies Deposit Company was an obvious scam, The Boston Daily
Advertiser published an illustrated explainer, some articles highlighting the stage
(13:00):
psychic hows, rather questionable qualifications, and a prediction that the
whole thing would collapse in short or. In the face
of this negative publicity and some twitchy depositors, Sarah Howe
decided that the best way forward was bluff. She announced
(13:22):
that anyone who wanted their money back with interest in full,
could have it immediately. She hoped that the ladies of
Boston would be so reassured by this offer that they
wouldn't take it up. Alas, the ladies of Boston were
not reassured at all. They asked for their money back,
and when Sarah Howe didn't have it, she went to jail.
(13:47):
The Lady's Deposit Company is a wonderful illustration of what
Dan Davies in his book Lying for Money, calls the
snowball effect. These scams need to suck in an ever
growing number of dupes to keep going, and eventually that
snowball of money rolling downhill, becoming bigger and bigger, simply
(14:11):
falls apart. It's too big. Remember, Sarah Howe was offering
to almost double your money in a year if you
invested with her. So let's watch the snowball from a
safe distance. Imagine that Sarah receives an investment of one
(14:32):
hundred dollars from a little old lady and steals it.
By the end of the year, that little old lady
expects her one hundred dollars back on top of ninety
six dollars in interest. So Sarah finds two more investors,
steals their money, and gives it to the little old lady.
(14:52):
But by the end of the following year, Sarah Howe
needs to have given nearly two hundred dollars to both
of her investors. To do that, she needs four new investors,
who shouldn't be hard to find if they think they're
going to double their money. When the four new investors
want a total of eight hundred dollars back, she just
(15:13):
needs to find eight new investors to join the Lady's
Deposit Company. Now you can see the trap here. Eventually
there will be no more lady depositors for the Lady's
Deposit Company. But what's perhaps less immediately obvious is that
in this little story, Sarah Howe will soon owe sixteen
(15:36):
hundred dollars to eight investors, and yet she only ever
stole one hundred dollars for herself. The growing snowball of
fraud is huge, and it needs to keep getting huger.
The profit for the fraudster is relatively tiny. No wonder
that so many fraudsters eventually get caught, and no wonder
(16:00):
perhaps that when they do get caught, so many of
them weep with relief. There will be tears a plenty,
but not much relief.
Speaker 3 (16:13):
After the break.
Speaker 1 (16:34):
In the summer of two thousand and three, Julia started
to try to recruit investors to buy hearts for women,
empowering women. Julia had been signed up by Tatiana, the
banker's wife, over champagne at the Spa. She'd sent three
thousand pounds to Elphie, the mother of Darling Archie from
the Fancy School, but Julia's own recruitment efforts were going nowhere.
(16:59):
Her rich friends sneered at her that had already been
approached so many times to invest in a heart that
the whole affair had become a bore ring joke. Horror
friends were less likely to have heard about the scheme,
but they were also less likely to have the money
to invest. I mentioned that as a matter of simple arithmetic,
(17:24):
For everyone who makes twenty four thousand pounds in a
pyramid scheme, there must be eight people who lose three
thousand pounds. But how can it be that so many
people lose out? Well, that's simple too. Every time a
new group of recruits is brought in, the entire operation
has to double in size. Every recruit finds two more recruits,
(17:47):
and every pyramid becomes two pyramids. The rolling snowball becomes
a vast snow boulder, then collapses into a destructive avalanche
of disappointment and loss. Pyramid schemes fail because they run
out of recruits just after becoming huge, when a vast
(18:10):
number of people have recently joined but not yet cashed out.
Julia was one of those people. In growing desperation, Julia
went to a recruitment party in the hope of recruiting
new investors. She'd been told to tales about parties in
(18:31):
central London mansions, champagne being quaffed with supermodels as suitcases
of cash were handed to people who'd reached the top
of the pyramid. That this recruitment party was in a
hairdressers instead of champagne. On ice, there was warm white wine,
(18:52):
and a growing sense of irritation that Julia's failure to
recruit was letting down everyone above her in the pyramid.
There was, of course, no sign of Claudia Schieffer. The
brilliance of women empowering women is that it seems to
(19:13):
have been largely self organizing. Many scams, in contrast, require
a lot of hard work. Just ask Sam Israel. He
set up his ill fated hedge fund by you Capital
in nineteen ninety six, assisted by an accountant named Dan Marino,
(19:34):
who lived with his mother and dreamed of greatness. Apparently,
Sam actually intended to run an honest hedge fund, or
if not quite honest, a hedge fund that would make
money for investors. His business plan, by You Capital would
use a new computer algorithm he'd developed, plus the skills
(19:58):
of a once great trader whom Sam had hired after
he had fallen on hard times, plus a few insider
tips like in the old days when he'd collect bag
of cash from the Pierre Hotel. That should do the trick,
thought Sam. But it didn't. The once great trader was
(20:18):
washed up. He made a lot of bad calls. The
computer algorithm seemed to misfire as often as it worked,
and Sam didn't have the same insider access that he
used to. After a couple of lackluster years in which
Sam loudly told his few investors that the fund's results
(20:38):
were great, he pondered his options. The results were not
in fact great, and if he simply published the firm's
accounts showing a loss, the investors would yell at him
for all his empty boasts, and Bayou Capital would collapse.
Or alternatively, Sam and his colleagues, the washed up trader
(21:03):
and the accountant who lived with his mum, could lie,
could publish audited accounts which claimed stella results. Like Sarah Howe,
they'd be offering fantastic returns. Unlike Sarah Howe, who would
simply steal money from new depositors and pay it out
(21:24):
as interest, they'd need to show some kind of evidence
that they were making profitable investments. To do that, they'd
need a fraudulent auditor. No problem. Dan Marino simply set
up his own audit firm, marking his own homework. Nobody
(21:45):
ever checked that the auditor who was verifying that Dan
Marino was telling the truth was.
Speaker 3 (21:50):
A Dan Marino.
Speaker 1 (21:53):
It probably didn't hurt that if anyone ever tried to
search for Dan Marino on the still young worldwide Web,
they were sure to get Dan Marino, the unimaginably famous
Miami Dolphins quarterback, rather than Dan Marino the crooked accountant.
(22:14):
For a while, the plan was that Sam would go
on a profitable streak and actually make the profits that
Dan Marino's fake accounts were claiming. But the snowball was
starting to grow. The more profit they said they were making,
the larger the fictional pot of money was growing, and
(22:34):
the harder it was for Sam and his partner to
catch up to their own lies. It didn't help that
Sam kept claiming to outperform the market. Dan Marino was
losing his mind at the fact that Sam couldn't control himself.
Speaker 3 (22:51):
When they had a good month and made money, they
used that as the performance number.
Speaker 1 (22:55):
Complained Dan to the journalist Gee Lawson.
Speaker 3 (22:57):
When they had a bad month, they used a made
up number.
Speaker 1 (23:01):
That won't work. If you let the fraud snowball grow
too big, you'll never get it under control. Sam is
Israel would never be able to catch up to his
own lies because he could never bring himself to pretend
he'd had a bad quarter when it had a good one.
Speaker 3 (23:17):
We went with grace and luls with integrity.
Speaker 1 (23:20):
Boasted Sam to his investors. Dan Marino knew the awful truth.
Speaker 3 (23:26):
I stopped tracking the published numbers against the real numbers.
Speaker 1 (23:29):
Said Marino. The snowball was already too big.
Speaker 3 (23:33):
Oh, it made me sick to my stomach.
Speaker 1 (23:37):
Four years after, the Ladies Deposit Company was exposed by
the Boston Daily Advertiser and collapsed, and Miss Sarah Howe
was sent to prison. Refined women of Boston, Massachusetts, were
intrigued to hear of a wonderful investment opportunity. A new bank,
founded for women by women and called the Boston Women's Bank,
(24:03):
paid interest of seven percent per month. Too good to miss,
or alternatively, too good to be true. After a couple
of years, the Boston Daily Advertiser discovered and published the truth.
The manager of the Boston Women's Bank was not missus J. C. Ewle,
(24:29):
as advertised, but an ex convict by the name of
Sarah Howe. Sarah Howe had learned one lesson this time.
She skipped town and moved to Chicago. In due course,
the refined Ladies of Chicago, we're intrigued to hear of
(24:53):
a wonderful investment opportunity The Lady's Provident Aid Society was
offering interest of Oh never mind, the police caught up
with Miss Sarah Howe shut down the Lady's Provident Aid Society,
and so enough as Howe was back in prison. Worth
it surely not in character, most definitely, Sometimes when the
(25:21):
snowball starts to roll, the fraudster just can't quit. Sam
Israel seemed to have it all, a loving wife and children,
a luxurious home, and at least on paper, a fortune
to his name. But appearances can be deceptive. Sam was
(25:42):
a mess. He was taking too much cocaine and drinking
far too much booze, and like so many people, he
had become addicted to painkillers after a back injury. All
the while, the fraud snowball was growing. But Sam and
Dan had one advantage, which is that a fraudulent hedge
(26:02):
fund doesn't have a cell by date. That's different from
the other scams we've heard about. Taty I was promising
Julia that women empowering women would multiply her money in
just six weeks. The Ladies Deposit Company promised to almost
double investors' money after a year. But by you capital
(26:23):
was different because hedge fund investors didn't tend to withdraw
their money if things seemed to be going well. Instead,
they sat back and watched the snowball grow. But the
more by you capital snowball grew, the harder it would
ever be for Sam Israel to trade his way out
(26:45):
of the lie. One September Friday, his computer algorithm suggested
a big bet on shares going up in the next week.
Sam made that bet. The following Tuesday morning, two airliners
swept out of the cloudless sky above Manhattan and crashed
(27:07):
into the World Trade Center. The world reeled with the
implications of the atrocity, but for Sam Israel and Dan Marino,
the only thing that mattered was how it changed their
own twisted financial world. Sam was aghast that his bet
had spectacularly backfired, while Dan Marino spotted an opportunity close
(27:33):
the fund. Said Dan Marino and ten investors, he lost
most of their money in the aftermath of nine to eleven,
and give the dregs back. Everyone will yell, but nobody
will suspect anything, and neither you nor I will go
to jail. Please speG Marino, but sam Israel wouldn't do it.
He knew that if by you capital folded, he might
(27:56):
escape jail, but it'd still lose his fancy home. He
should have listened to Marino, because within two years he
was going to lose his home anyway. Cautionary tales, We'll
be back in a moment. In two thousand and three,
(28:37):
Sam Israel was at home leaning over a line of
white powder with a rolled twenty dollar bill up his nose.
When his wife Janice walked in. She became upset. He
became outraged. How dare she suggests he was taking cocaine.
She persuaded him to take urine tests to ensure he
(28:59):
stayed off the drugs until one evening he angrily unzipped
his pants and went all over the bathroom floor, bellowing.
Speaker 3 (29:08):
You want yourn.
Speaker 1 (29:10):
At Thanksgiving that year, he passed out over the turkey.
Speaker 3 (29:15):
Oh.
Speaker 1 (29:19):
By Christmas two thousand and three, Janis had thrown him
out of their house and secured a protective order. Sam
rented the most tasteless, ostentatious bachelor pad he could find,
a vast Tudor style manner with outsized chandeliers, marble bathrooms
(29:40):
and comically huge beds. Sam paid the monthly rent of
twenty two thousand dollars to the house's owner, a gentleman
by the name of Donald Trump.
Speaker 4 (29:53):
So good, so good, amazing house, huge beds.
Speaker 1 (30:00):
Sam hung around clubs, tipping the bartender to introduce him
to pretty women. He fitted the Trump mansion with the
latest trading A seventeen screens so he could work from home.
He was still looking for a way to make all
the money back, but the fraud snowball that Bayou was
getting bigger and bigger, and Dan Marino had had a
(30:22):
couple of near misses when investors or regulators had asked
to see documents that would prove highly incriminating. Marino was
reduced to sending those incriminating documents to counterparties on a
Friday evening in the hope that they would be tossed
into a backlog file and then buried under the Monday
morning rush. Amazingly, that tactic worked, but it couldn't work forever.
(30:47):
Dan and Sam were going to jail for sure unless
Sam Israel could find a sure fire scheme to make
How big was the snowball? Now there were several hundred
million dollars. Sam Israel was starting to get desperate. There's
(31:08):
an old saying, you can't cheat an honest man, and
there's truth in that saying, because the premise of a
scam is often simply.
Speaker 3 (31:18):
I'm doing crimes, and if you come and do crimes
with me, we'll both make money.
Speaker 1 (31:24):
That's a sales pitch to drive away honest folk, but
it also has some appeal because it provides a logical
reason why there might be quick money to be made
for someone who could keep a secret. Sam Israel was
not an honest man. He'd seen enough cheating on Wall
Street to know that the game was often fixed, and
(31:46):
the crazy simplicity of the Bayou fraud, coupled perhaps with
the fact that Sam was taking a lot of drugs,
was just starting to make him doubt everything. How many
other hedge funds were just Ponzi schemes? What else was
a Ponzi scheme? He had seen the Federal Reserve magic
(32:06):
money out of thin air after that great crash of
nineteen eighty seven, when Sam had made so much money
and could have made more if the FED hadn't stepped in.
The FED stepped in after nine to eleven, too.
Speaker 3 (32:18):
Who exactly was running the world economy.
Speaker 1 (32:20):
Anyway, Sam started to run in strange conspiratorial circles. If
you want the full story, it's told in incredible cringe
making detail in Gee Lawson's book Octopus, which describes an
astonishing cast of characters and an even more astonishing array
(32:42):
of delusional beliefs. Sam became obsessed with finding the undoctored
footage showing who really killed JFK. He believed he had
been attacked by an assassin on the streets of Hamburg,
and that had blown the man's brains out in self defense.
Needless to say, Hamburg's police have no record at all
(33:04):
of such events. Above all, Sam came to believe in
a global conspiracy thirteen powerful families who truly ruled the world,
whom he called the Octopus. It all gets very, very
weird that do read the book. It's quite a trip.
(33:26):
But for our purposes, what we need to know is
that Sam Israel fell under the spell of a man
called Robert Booth Nichols, who was claimed to be a
top CIA agent, whose bare hands were said to be
deadly weapons, and who was undoubtedly a confidence trickster, like
(33:46):
an aging chain smoking James Bond. He swaggered around London
City with tight controls on firearms with a revolver in
a shoulder holster. Sam believed that Nichols had access to
a special CIA program which monitored every bank transaction on
the planet, an insider trader's dream, and he flew out
(34:09):
to London to beg Nichols to give it to him.
He'd do anything, he said. Do you have one hundred
million dollars in cash? Said Nichols.
Speaker 3 (34:18):
I do. I've got one hundred million in cash.
Speaker 1 (34:22):
Do you have one hundred and fifty million?
Speaker 3 (34:25):
Yes.
Speaker 1 (34:27):
Forget the special CIA program which monitors bank accounts, said Nichols.
We can make some real money together if we can
access a special secret market operated by the thirteen families
who together secretly rule the world. You know the octopus.
And just as Julia had said to Tatiana at the
(34:49):
Riverside spa, Sam Israel said to Nichols, sign me up,
but not for three thousand pounds, for more than one
hundred million dollars. With Nichols by his side whispering into
his ear, Sam Israel joined an absolutely bizarre world full
(35:12):
of conspiracy, theorist, fraudstans, all claiming to believe in the
existence of a secret market that can multiply your money
tenfold overnight, all secretly frustrated that they personally have never
been able to get access to that entirely fictional market,
and all trying to rip each other off. At one stage,
(35:34):
Nichols got sam Israel to give him ten million dollars
in cash on the basis of a story about a
stash of treasure stolen and hidden by a Japanese general
in the Second World War and protected by poison gas
booby traps. Then another con man persuaded Nichols to give
him a million dollars to help the finance an expedition
(35:57):
to find the exact same treasure. Can we have a recap?
Speaker 2 (36:02):
Of course, sam Israel was controlling one hundred million dollars
of Buy You Capital's money based on a fraud, invested
that money in Robert Nichols's fraud. Robert Nichols then invested
that money in yet another fraud.
Speaker 1 (36:16):
Exactly thank you, are you? Surely, though, it's quite hard
to give one hundred million dollars to a fraudster to
invest in a special market protected by assassins and controlled
by the thirteen families who really rule the world. There
are hard checks and balances in place. Several times Sam
Israel tried to invest the one hundred million in one
(36:38):
scam or another, and a banker or a stockbroker simply
refused to process the transaction until there was proof that
it was genuine, and there never was. In the end,
the Bayou Capital ponzi scheme was exposed. But it wasn't
because sam Israel's investors believed that he'd lost his mind,
(37:00):
or even that he had lost their money. They just
believed that he'd lost his touch. They noticed that sam
wasn't spending much time at work. Little did they know
that this was because he was in Europe being taught
how to kill a person with his bare hands by
a manly believed was an elite CIA operative. Bayou's investors
(37:23):
asked for their money back, which would have been fine,
except that most of that money had only ever existed
in Dan Marino's fraudulent accounts. The snowball had grown enormous.
The fraud was at last exposed. Sam Israel was given
a sentence of twenty years, and, as an act of
(37:46):
leniency that seems to be common for white collar criminals
eight weeks of freedom to get his affairs in order
before reporting to jail. Listener, he did not report to jail.
Police found his car parked on the Bear Mountain Bridge
(38:07):
high over the Hudson River in upstate New York. He
left a suicide note and smudged in the dust on
his car's hood were the words suicide is painless. But
Sam Israel's suicide note was as fictional as his investment returns.
The authorities tracked him down alive and well and a
(38:29):
campsite in Massachusetts. They promptly sent him to jail. By
faking his own suicide, He got just three more weeks
of freedom, and of course landed his girlfriend in trouble
for helping him out. Worth it surely not in character.
Most definitely, Julia's investment troubles, thankfully, were rather more mundane.
(38:56):
Having invested three thousand pounds in the women Empowering Women pyramid,
she found herself fielding ever more strident calls from people
further up the pyramid, berating her not finding more recruits. Tricksy,
Pucky and Buttons all had their say. It was, says Julia,
(39:17):
like being bullied by a bunch of fairies. But the
curious thing about women empowering women nobody knows who started it.
We think that it's hard to be sure. That most
ponsi schemes fail. When they do, it's because of the
relentless logic of the snowball. Sarah Howe went to prison twice.
(39:40):
Sam Israel faked his own suicide in a desperate attempt
to escape. But the unknown woman who created the whole
spiel about hearts and empowering other women, she's the exception
to the rule that fraud doesn't pay. She pushed a
few snowballs down a steep snowy hill, decided that she'd
(40:05):
made enough money, and before the casualties began to mount
down below, she walked away. But those casualties did exist,
and Julia met them. The grumpy fairies could probably afford
to lose the money, but it was less funny to
receive voicemails from distraught Filipino cleaners who'd bought hearts and
(40:30):
now feared they'd lose three thousand pounds they definitely could
not afford to squander, having run out of spa going
pony riding ladies who lunch the women empowering women snowball
had started to flatten much poorer women, women who would
struggle to pick themselves up after the snowball had rolled on.
(40:57):
Key sources for this episode include Julia Stevenson's article Broken
Hearts Club, Daniel Davis's book Lying for Money, and for
the astonishing story of Sam Israel Gee Larson's book Octopus.
This live edition of Cautionary Tales was written by me
Tim Harford with Andrew Wright. Tonight you heard the voice
(41:21):
talents of Sarah Job and Stuart mclachlarning. The original music
is the work for Pascal Wise. Our b s cl
interpreter was Katherine Motson. The show was produced by Alice Fines,
Marilyn Rusk and Ryan Dilling. Sarah Nick said it took
the script. A sound engineer was Andrew Baylis. The thanks
(41:41):
to Zury Sedmand Milm and the team at the British
Best Level of Economics. Portional Tales is a production of
Pushkin Industries. If you like the show, please remember to rate,
share and review. Wanted to hear the show a free
sign up for Pushkin Class on the show page of
Apple Podcasts of Pushkin FM, slash Truce. Thank you that
(42:10):
was fun, Thank you so much.
Speaker 2 (42:12):
Guys.
Speaker 1 (42:14):
A Trump impression was okay, wasn't it.
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations.
The Nikki Glaser Podcast
Every week comedian and infamous roaster Nikki Glaser provides a fun, fast-paced, and brutally honest look into current pop-culture and her own personal life.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.