(Updates with the U.S. attorney's office in Manhattan prosecuting the case, comment from Grabowski's lawyer, bail conditions, additional details of allegations.)
By Chad Bray
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Six individuals at one time affiliated with Sky Capital Holdings Ltd., including its founder, have been charged in an alleged $140 million investment fraud and stock manipulation scheme.
Ross H. Mandell, the founder and former chief executive of Sky Capital, and five others have been charged with conspiracy and securities fraud. They each face up to 20 years in prison on the fraud charge.
They surrendered to the Federal Bureau of Investigation Wednesday morning. The criminal case was brought by the U.S. Attorney's office in Manhattan.
A lawyer for Mandell didn't immediately return a phone call seeking comment Wednesday.
The U.S. Securities and Exchange Commission also brought civil fraud charges Wednesday against Mandell, five others and the firm, which recently changed its name to Granta Capital LLC.
Mandell, 52, of Boca Raton, Fla., was the firm's president, CEO and major shareholder until April 2008, according to the SEC.
A call to Sky Capital's offices in New York wasn't immediately returned Wednesday.
Others charged in the case are: Stephen Shea, 37, Sky Capital's former chief operating officer; and former Sky Capital brokers Adam Harrington, 39, of Miami; Arn Wilson, 52, of Concord, N.C.; Michael Passaro, 46, of Delray Beach, Fla.; and Robert Grabowski, 41, of Staten Island.
"Adam Harrington engaged in absolutely no wrongdoing while employed with any company," said Michael Bachner, Harrington's lawyer. "We are confident that after all the facts are disclosed that Mr. Harrington will be 100% vindicated."
A lawyer for Shea declined comment.
"The investors, Mr. Grabowski's clients, are and were well informed sophisticated customers," said Bettina Schein, Grabowski's lawyer. "They were not grandmas in Omaha getting cold calls."
Lawyers for Passaro and Wilson didn't immediately return phone calls seeking comment.
The men entered not guilty pleas to the charges at a hearing before a U.S. magistrate judge in Manhattan Wednesday.
Bail was set at $5 million for Mandell and $1 million each for the other defendants.
Prosecutors have alleged Mandell and others, between 1998 and 2006, defrauded investors through two investment schemes involving Sky Capital and Thornwater Co. LP, a New York broker-dealer that ceased operations in February 2003. Grabowski was formerly the president and CEO of Thornwater.
Mandell and others allegedly solicited millions of dollars under false pretenses; manipulated the market for shares in Sky Capital and an affiliated company, which were publicly traded in London until November 2006; failing to use investor funds as promised and misappropriating funds, prosecutors said.
Prosecutors said about $140 million was raised from investors in the two schemes.
To further the scheme, the defendants and others used high-pressure sales tactics and made material misrepresentations to convince victims to invest millions of dollars through Thornwater and later through Sky Capital, prosecutors said.
"Boiler room tactics like those used by Sky Capital and its brokers undercut the level of honesty and fair play we seek to maintain in the securities markets," said James Clarkson, acting director of the SEC's New York regional office. "This firm and these brokers went to great lengths to repeatedly lie to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares."
Due to Mandell's disciplinary history in the securities industry, Sky Capital agreed, as a condition of its membership in the National Association of Securities Dealers, that Mandell wouldn't supervise anyone or hold a supervisory position at the firm, which was founded in 2001, prosecutors said. Nevertheless, he exercised day-to-day management over Sky Capital and its companies, prosecutors said.
Mandell joined Thornwater in 1997 as a senior vice president and gained control of the company in 1999, prosecutors said. He exercised direct or indirect control of Thornwater until it ceased operations.
Investor money was used to pay excessive, undisclosed payments to brokers to induce them to raise funds for Sky Capital and to provide undisclosed perks, as well as to pay off prior investors who lost money investing through Thornwater or Sky Capital, prosecutors said.
Substantial funds also were used to enrich Mandell, Shea and others, prosecutors said.
The SEC said Mandell's compensation from Sky Capital and other related companies exceeded $1.5 million in 2006.
Mandell also used company funds for a lavish lifestyle for himself and Sky Capital's brokers, including first-class flights, five-star hotels and adult entertainment on frequent trips to London, the SEC said.
He used company funds to pay a decorator for work done on his penthouse apartment at the Trump UN Plaza building in Manhattan and to pay for child care, the SEC said.
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
(END) Dow Jones Newswires
July 08, 2009 16:32 ET (20:32 GMT)