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Six Charged in $140 Million Investment Fraud and Stock Manipulation Scheme
LEV L. DASSIN, the Acting United States Attorney for
the Southern District of New York, and JOSEPH M. DEMAREST, JR.,
the Assistant Director-in-Charge of the New York Office of the
Federal Bureau of Investigation, announced today that ROSS H.
MANDELL, STEPHEN SHEA, ADAM HARRINGTON, a/k/a "Adam Rukdeschel,"
ARN WILSON, ROBERT GRABOWSKI, and MICHAEL PASSARO have been
charged in a two-count Indictment with conspiracy to commit
securities, wire and mail fraud; and with securities fraud. The
defendants surrendered this morning to agents of the FBI.
According to the two-count Indictment unsealed today in
Manhattan federal court:
From 1998 through 2006, the defendants participated in
a scheme to defraud investors via two successive securities
broker-dealers: The Thornwater Company, L.P., ("Thornwater"); and
Sky Capital LLC and associated entities, including Sky Capital
Enterprises Inc., and Sky Capital Holdings Ltd. (collectively
"Sky Capital"). Until late 2006, shares of Sky Capital Holdings
("SKH") and Sky Capital Enterprises ("SKE") were traded publicly
on the Alternative Investment Market of the London Stock
Exchange. Through material misrepresentations and omissions, the
defendants induced victims to invest in purported investment
opportunities promising large returns, such as private
placements, offers to purchase restricted stock, and offers to
purchase Sky Capital securities. In fact, investor funds were
substantially used to enrich the defendants and others; 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,
acting primarily from Thornwater and Sky Capital's offices in New
York, New York, raised a total of approximately $140 million from
investors.
As part of the scheme the defendants and others
manipulated the secondary market for SKH and SKE stock. This was
done to placate existing investors; to induce customers to make
further investments in various investment vehicles at a
"discount" from the price of the publicly-traded stock; and to
enrich members of the scheme who had substantial holdings in Sky
Capital. The manipulation was effected by using high-pressure
sales tactics and materially false statements and omissions to
induce investors to buy SKH and/or SKE stock; to discourage
investors from selling the stock; by enforcing a "no net sales"
policy whereby brokers were instructed not to accept SKH or SKE
sell orders unless a matching buy order could be generated for
another customer; by improperly "crossing" SKH and/or SKE stock
among customer accounts to maintain the market price; and by
making unauthorized purchases of SKH and/or SKE stock in retail
customer accounts. The manipulation was designed to make it
appear that there was demand for SKH and SKE stock (when in fact
there was not); to control the market in the stock; and to
maintain and increase the share price. To facilitate the market
manipulation, MANDELL, SHEA, and HARRINGTON offered excessive
undisclosed payments to Sky Capital brokers, including
HARRINGTON, WILSON, GRABOWSKI, and PASSARO. The payments were
often disguised as "advances," "loans," or "special bonuses." To
generate funds for these payments, participants in the scheme, at
MANDELL's direction, created a "spread" on SKH and SKE stock by
negotiating to purchase large blocks of Sky Capital stock from
Sky investors at discounted prices and then soliciting other Sky
customers to purchase the same Sky Capital stock at the higher
price. The resultant profit was split between Sky Capital and
the brokers.
ROSS H. MANDELL, 52, of Boca Raton, Florida, was
previously Chief Executive Officer of various Sky Capital
companies and an undisclosed principal of Thornwater, as well as
a Thornwater broker and investment banker. MANDELL exercised
day-to-day management control over various Sky Capital companies
and their employees either directly or through others despite Sky
Capital's agreement with the NASD that, because of MANDELL's
disciplinary history in the securities industry, MANDELL would
not hold a supervisory position.
STEPHEN SHEA, 37, of Brooklyn, New York, was previously
President and Chief Operating Officer of Sky Capital Holdings and
of Sky Capital LLC; a member of Sky Capital Enterprises' Board of
Directors; and Thornwater's Operations Principal. SHEA oversaw
all aspects of Sky Capital's business operations, including
customer accounts, securities broker-dealer activities, and
securities trading.
ADAM HARRINGTON, 39, of Miami, Florida, ARN WILSON, 52,
of Concord, North Carolina, and MICHAEL PASSARO, 46, of Delray
Beach, Florida, were previously registered brokers at Sky Capital
and Thornwater. HARRINGTON, WILSON, and PASSARO each actively
solicited customers to purchase Sky Capital securities and
directed other brokers to do the same.
ROBERT GRABOWSKI, 41, of Staten Island, New York, was
previously a registered broker at Sky Capital and President and
CEO of Thornwater. GRABOWSKI participated in soliciting
investors at Thornwater and Sky Capital.
The defendants are expected to be arraigned today
before United States Magistrate Judge ANDREW J. PECK in Manhattan
federal court. The case has been assigned to United States
District Judge PAUL A. CROTTY.
If convicted, MANDELL, SHEA, HARRINGTON, WILSON,
GRABOWSKI, and PASSARO each face a maximum sentence on the
conspiracy count of 5 years in prison and a maximum fine of
$250,000, or twice the gross gain or loss from the offense. On
the securities fraud count, the defendants face a maximum
sentence of 20 years in prison and a maximum fine of $5 million,
or twice the gross gain or loss from the offense.
Mr. DASSIN praised the investigative work of the FBI in
this case, and thanked the United States Securities and Exchange
Commission for its assistance. Mr. DASSIN also thanked the
Financial Services Authority and local law enforcement agencies
in the United Kingdom for their assistance. He added that the
investigation is continuing.
Assistant United States Attorneys JOSHUA A. GOLDBERG
and ALEXANDER J. WILLSCHER are in charge of the prosecution.
The charges contained in the Indictment are merely
accusations, and the defendants are presumed innocent unless and
until proven guilty.
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