Former Sky Capital CEO Sentenced in Manhattan Federal Court to 12 Years in Prison for Committing Massive Investment Fraud and Stock Manipulation Scheme

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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In addition to his prison term, MANDELL, 55, of Boca Raton, Florida, was sentenced to three years of supervised release and ordered to forfeit $50 million.

Harrington was found guilty at trial with MANDELL and is scheduled to be sentenced tomorrow. Shea, Wilson, Grabowski, and Passaro previously pled guilty before the trial of their co-conspirators and are awaiting sentencing.

Mr. Bharara praised the investigative work of the Federal Bureau of Investigation in this case and thanked the U.S. Securities and Exchange Commission for its assistance. He also thanked the regulatory policy group of the London Stock Exchange, the Financial Services Authority, and local law enforcement agencies in the United Kingdom for their assistance.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which U.S. Attorney Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Katherine Goldstein is in charge of the prosecution.