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