January 8, 2013
post contributed by Katerina Yovchev
The December New York Hedge Fund Roundtable Event began with the introduction of a new philanthropic initiative with Youth About Business. Sam Kirk briefed the membership on the leadership training program for young individuals from struggling communities, and introduced current students as well as a graduate who came to support the organization. Through a structured program, students are introduced to SEC filings and the inner workings of M&A transactions with the help of high level executives in the financial industry. Through this exposure, students’ knowledge and test scores more than doubled, resulting in a dramatic social and economic return.
Arthur Lund, a managing partner of BDO USA LLP, then introduced Guy Lawson, the author of Octopus, who shared his impressions of Samuel Israel, III, a charming and charismatic hedge fund manager. Stanley Goldstein, the Roundtable’s founder, led the discussion with Lawson and brought the audience through some of the events that unfold in the book. Lawson explained the background of the story, how Israel built Bayou Capital into a 400 million dollar fund, and outlined some of the major industry problems that allowed him to fake a return of 18%. Lawson emphasized the role of the accounting firms, who are compensated by the hedge funds that hired them, he said, and the responsibility of the SEC to understand the relationships among the many players in the financial market.
The focus then shifted to the second half of the book, which starts by depicting Israel as a state of the art trader in 2004, claiming to be using a computer program that took advantage of small price fluctuations. As Lawson told the rest of the story, it started to become clear why HBO jumped on the rights for a movie. There are CIA assassins, international conspiracy theories, and an eccentric main character. This also isn’t the classic Ponzi scheme story, Lawson said, as Bayou Capital wasn’t created to scam people out of money, the downfall of Israel was due to the decision he made when he was down 50%.
The discussion ended with intriguing questions and a candid conversation with Lawson about how we can prevent something like this from happening again. Lawson closed the discussion by reading a message written directly from Sam Israel to the New York Hedge Fund Roundtable: "I am sorry to have tarnished the business I loved and lived for my entire life. I am deeply ashamed to have disgraced you all by proxy. There comes a time in trading when the hard decision has to be made--whether to tough it out, or take an easier path that may present itself. We all must compromise, but we should never compromise our morals or integrity. The price is dear, as I found out. Nothing is worth this. Not the embarrassment, disappointment, failure--nothing. I wish all of you success. I hope you make the right, hard choices I wasn't brave enough to make myself."