Preet Bharara, the United States Attorney for the Southern District of New York, announced that ROSS MANDELL, a former chief executive officer of Sky Capital, LLC, a brokerage firm, and related Sky Capital companies, was sentenced today in Manhattan federal court to 12 years in prison. MANDELL was the leader of a scheme to defraud investors through two successive securities broker-dealers that he controlled—The Thornwater Company, L.P. and Sky Capital, LLC. In July 2011, he was convicted of conspiracy, securities fraud, wire fraud, and mail fraud charges after a five-week jury trial before U.S. District Judge Paul A. Crotty.
Manhattan U.S. Attorney Preet Bharara stated: “For nearly a decade, Ross Mandell continuously lied and directed his brokers to lie to investors, convincing them to make investments that Mandell knew were not what was promised. A Manhattan federal jury saw through his deception, and with today’s sentence, he will now be held to account for his fraud.”
According to the superseding indictment, other court documents, and evidence presented during trial:
From 1998 through 2006, MANDELL and his co-conspirators, Adam Harrington, Stephen Shea, Arn Wilson, Robert Grabowski, and Michael Passaro, made material misrepresentations and omissions to investors in an effort to get them to invest in Thornwater and Sky Capital-related private placements. The defendants then used the investor funds for their own personal gain, including to pay excessive undisclosed commissions to brokers and to pay off victims who had lost money through prior purported investment opportunities. In connection with the scheme, the defendants raised more than $50 million from investors.
As part of the scheme, MANDELL and others directed the brokers at Sky Capital, LLC to manipulate the market prices of two Sky Capital stocks, which enabled them to raise tens of millions of dollars from investors through additional Sky Capital private placements with promises that the private placement shares of the stocks were “discounted” to the purported market price. The defendants also enforced a “no net sales” policy and instructed brokers not to accept Sky Capital sell orders unless a matching buy order could be generated from another Sky Capital customer, for the purpose of maintaining the market price of the Sky Capital stocks. The defendants and others used high-pressure sales tactics and made materially false statements and
omissions to induce investors to buy Sky Capital stock and to discourage them from selling. The defendants and others also made unauthorized purchases of Sky Capital stock in customer accounts as part of the no net sales policy.
To facilitate the market manipulation, MANDELL and Harrington offered excessive undisclosed payments to Sky Capital brokers—sometimes as much as 400 percent more than their normal commissions. The payments were often disguised as “advances,” “loans,” or “special bonuses.” To generate funds for these payments, MANDELL directed participants in the scheme to create a “spread” on Sky Capital stock by negotiating to purchase large blocks from Sky investors at discounted prices. They then solicited other Sky customers to purchase the same stock at the higher price. The profit was split between Sky Capital and the brokers.
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