"Octopus" Looks at Bayou Hedge Fund's Collapse - Review THE first third of "Octopus," Guy Lawson's new book on the 2005 collapse of the Bayou Group hedge fund, is what you might expect: an engrossing tale of the rise of Samuel Israel III, a cocaine-snorting crook who started his firm in the basement of his Westchester County home. If the rest were simply the story of Mr. Israel's inevitable fall, it would still be a darn good read. But on Page 139, "Octopus" - to be published next week by Crown - takes a startling 90-degree turn into Crazy Town. By this point, in 2004, Mr. Israel, a trader whose main talent involved front-running the stock picks of far smarter men, has secretly run Bayou into a $117 million hole. He needs a fast hundred million or two to stave off collapse. It is then, during a trip to London, that a mysterious stranger takes Mr. Israel, and the reader, on a bizarre journey down a multibillion-dollar rabbit hole. What follows is surely one of the oddest Wall Street tales I've read in 30 years, and it's what transforms "Octopus" from a good book into a special one. Which came as a surprise, at least to me. Mr. Lawson is not a financial writer, and his last book, "The Brotherhoods," co-written with William Oldham, the story of two New York cops who moonlighted for the Mafia, was almost too dense to read. Nor did Bayou's story seem all that spectacular. It was just another neo-Ponzi scheme that wasn't as big as Bernie Madoff's. The only thing I remembered was Mr. Israel's botched attempt to fake his own suicide by jumping off a bridge in upstate New York. But Mr. Lawson found gold, by securing Mr. Israel's cooperation in a series of prison interviews in which he unspooled his story - little of which, it appears, ever made it into the press. Mr. Israel was a likable rich kid from New Orleans who started as an errand boy in a small Wall Street trading outfit in the early 1980s. He paints a picture of rampant criminality all around him - insider trading, front-running, bags of cash - and contends that all of Wall Street was similarly corrupt, a transparent bit of rationalization. In time, Mr. Israel graduates to trading on his own, chasing fractions of points here and there. In 1996, with two partners, he founds Bayou, which does well enough to relocate from his basement to sumptuous headquarters in a Connecticut boathouse. Soon, the book says, Mr. Israel has a broken marriage, chronic back pain, a nasty drug problem, and a gaudy mansion he rents from Donald Trump. But Bayou is a mirage from the get-go. Mr. Israel draws investors by claiming to have a proprietary computer program, which he calls Forward Propagation. He says it can correctly predict stock movements 86 percent of the time. It's a sham, as is Bayou's trading record. From the beginning Mr. Israel's trades lose money, more and more each passing month. According to the book, he lies to everyone about his record, and his accountant rigs up a dummy auditing firm to bless it all. Amazingly, no one notices - not his competitors, not federal regulators, not even his clearing firm. Desperate to claw out of his $117 million hole, Mr. Israel meets his mystery man, Robert Booth Nichols, in 2004. Mr. Nichols, who died five years later, was actually a kind of celebrity, a star of conspiracy theory world who was portrayed on the Internet as a longtime C.I.A. operative linked to a shadow world government, the holder of secrets to everything from the Kennedy assassination to a World War II-era hoard of Japanese gold. Some called this vast "conspiracy" the Octopus. Mr. Nichols tells Mr. Israel that everything he knows about the world and its governments is a lie, that the world is in fact run by 13 ruling families, and that all known capital markets are facades. World governments are kept financially afloat, he purrs, by a global "shadow market" consisting of secret high-yield bonds. For only $100 million, Mr. Nichols says, he can give Mr. Israel entrée. Like I said, Crazy Town. Mr. Nichols, of course, is a con man - and a very capable one at that. Mr. Israel is hooked, and the two ricochet from New York, where Mr. Nichols moves into Mr. Israel's mansion, to London, where they secretly "trade" shadow-market bonds, and to Hamburg. There, Mr. Israel claims, he is followed by a rival trading faction, and shoots at and believes he kills a man in a turban. I'm serious. Mr. Israel actually transfers $100 million of Bayou's money into overseas accounts to trade with Mr. Nichols, and somehow manages to hold onto most of it. In the end, Mr. Nichols manages to swindle him out of "only" $10 million. In the meantime, Bayou investors discover Mr. Israel's fraud and the F.B.I. shows up. The book jumps forward quickly from there: The next thing you know, Mr. Israel is standing on that upstate bridge, deliberating suicide. He later hides out in a Connecticut trailer park, turns himself in and is sent to prison. Mr. Nichols cuts a deal with the feds before dying mysteriously in a Swiss hotel room. THIS is a fantastic story, in both senses of the word, with a freshness that recalls "Liar's Poker," the Michael Lewis book from more than 20 years ago. The only real flaw is a nagging hermetic quality. Mr. Israel is a good narrator, candid about his flaws, but Mr. Lawson relies on him a bit too heavily. A few other voices are heard, notably Dan Marino, Mr. Israel's accountant and Bayou's chief financial officer (also now in prison), but by and large this is Ms. Israel's story. No Bayou employees are interviewed, nor a single investor. We have no real sense of how reliable Mr. Israel's account actually is; a few of his tales seem a bit too good to be true, and a few, like that of a drunk-driving arrest, come with no dates, places or times. Two of the strongest sections in the book come when Mr. Lawson does corral outside viewpoints, especially one from a George W. Bush cousin who is obliged to sit and listen dumbfounded as a manic Mr. Israel insists that he get the White House to intervene in the shadow market. "My name is Sam Israel and I am a criminal" reads the note Mr. Israel slides to federal prosecutors on their first meeting. I am a liar and a cheat. That he is. But he's a liar and a cheat with one heckuva story.