Bloomberg News

Sky Capital Founder Mandell Convicted in $140 Million Fraud

July 27, 2011

July 27 (Bloomberg) -- Sky Capital Holdings Ltd. founder Ross Mandell was convicted of operating what the U.S. said was an eight-year long scheme that defrauded investors out of $140 million.

Mandell, 54, of Boca Raton, Florida, was found guilty yesterday by a federal jury in New York of all four counts he was charged with, conspiracy, securities fraud, wire fraud and mail fraud, after a trial before U.S. District Judge Paul Crotty in Manhattan.

Adam Harrington, 41, of Miami, a former broker at Sky Capital who was tried with Mandell, was convicted of the same four counts. The jury began its deliberations July 22.

Prosecutors said the evidence showed the defendants used the funds for tens of thousands of dollars of personal expenditures like private jets, luxury hotels and expensive Swiss watches.

Jurors were shown bills for more than $162,400 in charges between May 2001 and January 2006 made on Mandell’s corporate American Express card that prosecutors said were for “adult entertainment” that included visits to strip clubs like Stringfellows in London as well as “hostesses.”

Excessive Commissions

Mandell, Harrington and others at Sky Capital also used the money to pay themselves excessive commissions and pay off other victims who’d lost money through prior purported investment opportunities, Assistant U.S. Attorneys Pablo Quinones and Katherine Goldstein argued during the trial.

Crotty declined to set a sentencing date or revoke bail for Mandell and Harrington. The judge said he wouldn’t rule on prosecutors’ request to jail both men before sentencing because they pose a flight risk. He gave defense lawyers until Aug. 5 to file legal papers before issuing a ruling.

“It’s unjust,” Harrington said about the verdict as he sat outside the courtroom. “We will appeal.”

Most of the jurors declined to comment on their deliberations. One who identified herself as Carmen said, “there was enough evidence. It was a tough decision. We based it on the judge’s charge.”

Mandell and Harrington were accused of manipulating shares in two Sky Capital companies traded on the Alternative Investment Market of the London Stock Exchange. The U.S. said the two solicited millions of dollars from victims for what they claimed were restricted stock offerings or private placements that promised large returns.

Issues For Appeal

Mandell’s lawyer, Jeffrey Hoffman, said after the verdict that “there are very significant issues for appeal,” citing a U.S. Supreme Court ruling last year in Morrison v. National Australia Bank that U.S. securities laws don’t protect foreign investors who buy stocks on overseas exchanges in a civil case.

“The judge has ruled that Morrison did not apply,” Hoffman said. “We think ultimately that the Second Circuit Court of Appeals and the Supreme Court will say that Morrison applies equally to civil as well as criminal cases.”

Four other men were arrested and charged in the case and have pleaded guilty. Two of them, Robert Grabowski and Michael Passaro, both former Sky Capital brokers, agreed to cooperate with the U.S. and testified against Mandell and Harrington.

“There is a mountain of evidence that these men defrauded investors of Sky Capital stock,” Goldstein told jurors in closing arguments on July 20.

Urged to Lie

She said Mandell urged his brokers to repeatedly lie to investors by offering investments in purported initial public offerings in companies that in reality only had a handful of employees.

Goldstein cited several recordings made by the Federal Bureau of Investigation and played for the jury during the trial, including one in which Mandell was heard telling brokers, “You have to lie, you have to paint a rosy picture. That’s your choice.”

In another conversation, cited by Goldstein, Mandell warned his brokers they couldn’t tell the truth about their investment schemes, saying, “If Sky goes belly up, we’re all going to be embroiled in a big scandal,” adding, “There will be no one, no one that’s safe.”

Prosecutors argued during closing arguments that Mandell and Harrington were motivated in the scheme by greed. Company records indicate Mandell paid himself a salary of more than $7.3 million and charged more than $440,000 in personal expenses to the company’s American Express card.

Interior Decorating

Mandell charged a family visit to Walt Disney World in Florida to the company and tens of thousands of dollars on interior decorating for his homes, lavish trips and travel on private jets for himself and his family, Goldstein said.

After one investor, a jeweler, complained, Mandell directed the investor to deliver two Patek Philippe watches to his office which he purchased with Sky Capital funds for $50,000. Mandell directed the transaction be recorded as “consulting fee” paid to the investor, prosecutors said.

During a five-year period between June 2001 and October 2006, prosecutors said Mandell also racked up more than $1.45 million in charges to the Dorchester Hotel in London charged to the Sky Capital corporate account.

Mandell founded Sky Capital in or about January 2001 and served as chief executive officer of both Sky Capital Holdings and Sky Capital Enterprises, as well as serving on the board of various units of the company, prosecutors said.

Harrington worked as a registered broker for Sky Capital from August 2002 until about September 2005, the U.S. said. Goldstein said Harrington was paid $3.1 million for his role in the scheme.

Hoffman, Mandell’s lawyer, argued to jurors that his client had complied with SEC regulations and didn’t defraud clients.

Misleading Evidence

“The evidence in this case is misleading and tortured,” Hoffman told jurors July 21. “He did everything he could. He did what the law required. He did what he thought was right.”

Michael Bachner, a lawyer for Harrington, argued during his July 20 closing statement to jurors that some of the cooperating witnesses were drug users who’d lied about their own drug use and therefore weren’t credible.

He said the cooperators were also willing to implicate his client because they wanted to avoid going to prison for their own crimes.

“What you have is a case based on a flawed foundation,” Bachner said. “They’ve been paid with something more profitable, they’ve been promised their freedom. Keep in mind their motivation here.”

Boiler Room

The U.S. Securities and Exchange Commission filed civil charges in the case on the same day the six were arrested, accusing the suspects of raising more than $61 million in a so- called “boiler room” scheme that restricted investors from selling their shares.

The SEC said Sky Capital raised the money from September 2002 to November 2006, implementing a “no net sales” policy that prevented investors from selling their stocks in two Sky companies. When trading in those stocks was suspended by the London Stock Exchange in 2006, the investments were rendered worthless.

The criminal case is U.S. v. Mandell, 09-cr-00662, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Bob Van Voris in New York. Editors: Mary Romano, Peter Blumberg

To contact the reporters on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net; Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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