FORMER SKY CAPITAL CEO AND SENIOR BROKER FOUND GUILTY IN MANHATTAN FEDERAL COURT FOR COMMITTING MASSIVE INVESTMENT FRAUD AND STOCK MANIPULATION SCHEME

United States Attorney
Southern District of New York
FOR IMMEDIATE RELEASE CONTACT: U.S. ATTORNEY’S OFFICE
JULY 26, 2011 ELLEN DAVIS, CARLY SULLIVAN,

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, and ADAM HARRINGTON, a
senior broker at Sky Capital, were found guilty today in
Manhattan federal court on all four counts for their involvement
in a scheme to defraud investors through two successive
securities broker-dealers –- The Thornwater Company, L.P.
(“Thornwater”) and Sky Capital, LLC. MANDELL and HARRINGTON were
convicted after a five-week trial presided over by U.S. District
Judge PAUL A. CROTTY.
Manhattan U.S. Attorney PREET BHARARA stated: “Ross
Mandell and Adam Harrington were masters of deception who had no
qualms about lying to investors, manipulating stock prices, and
using dubious trading practices to enrich themselves at the
expense of their victims. Today, a jury in Manhattan federal
court saw through their elaborate scheme and recognized the
defendants as the shameless fraudsters they truly are. They will
now pay for their crimes.”
According to the Superseding Indictment filed in
Manhattan federal court, other court documents, and statements
made during trial:
From 1998 through 2006, MANDELL, HARRINGTON and their
co-conspirators STEPHEN SHEA, ARN WILSON, ROBERT GRABOWSKI, and
MICHAEL PASSARO participated in a scheme to defraud investors
through material misrepresentations and omissions that induced
individuals to invest in Thornwater and Sky Capital-related
private placements. In fact, the defendants used investor funds
to enrich themselves 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, operating out of Thornwater and
Sky Capital’s offices in New York, New York, raised a total of
approximately $140 million from investors. MANDELL controlled
the operations of both broker-dealers.
As part of the scheme, MANDELL and HARRINGTON directed
the brokers at Sky Capital, LLC to manipulate the market prices
of two Sky Capital stocks – Sky Capital Holdings Ltd., and Sky
Capital Enterprises Inc. (collectively “Sky Capital”). By
manipulating the market price of the Sky Capital stocks, the
defendants were able to raise tens of millions of dollars from
investors through additional Sky Capital private placements with
promises that the private placement shares of Sky Capital stocks
were “discounted” to the purported market price. To that end,
the defendants 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.
* * *
MANDELL, 54, of Boca Raton, Florida, and HARRINGTON,
41, of Miami, Florida were both found guilty of one count of
conspiracy to commit securities fraud, wire fraud and mail fraud;
one count of securities fraud; one count of wire fraud; and one
count of mail fraud. They each face a maximum sentence of 65
years in prison, a maximum fine of $5 million or twice the gross
pecuniary gain or loss, and a maximum term of supervised release
of three years.
SHEA, WILSON, GRABOWSKI, and PASSARO have previously
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pled guilty and their sentencings are pending.
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. Attorneys PABLO
QUIÑONES and KATHERINE GOLDSTEIN are in charge of the
prosecution.
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