Boiler room brokers get burned by SEC
The Securities and Exchange Commission has charged New York-based broker-dealer Sky Capital LLC and six individuals involved in a fraudulent boiler room scheme that raised millions of dollars from U.S. and UK investors who were then restricted from selling their stock, and their investments later became worthless.
The SEC alleges that the firm's founder, president and CEO Ross Mandell directed Sky Capital brokers to make material misrepresentations, omit material information, and use high-pressure sales tactics to induce customers to purchase stock in two related companies - Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (Sky Entities). Sky Capital brokers used scripts to solicit investors for the private placements, and based their sales pitches on what Mandell told them. The brokers enjoyed hefty undisclosed commissions and other perks, and Mandell used investor funds to subsidize his own lifestyle including expensive travel and hotels, adult entertainment, and child care expenses.
"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."
In addition to Sky Capital and Mandell, who resides in Boca Raton, FL, the SEC's complaint charges the firm's former chief operating officer Stephen Shea of Brooklyn and four former registered representatives at the firm: Robert Grabowski of Staten Island, Adam Harrington (a/k/a Adam Rukdeschel) of Miami, FL, Michael Passaro of Delray Beach, FL, and Arn Wilson of Concord, NC. Sky Capital is also known as Granta Capital LLC.
According to the SEC's complaint, filed in federal court in Manhattan, Sky Capital raised more than $61 million from investors between September 2002 and November 2006. Sky Capital implemented and enforced a "no net sales" policy that essentially prevented investors from selling their Sky Entities stocks that were otherwise publicly traded on the Alternative Investment Market of the London Stock Exchange. Customers were not told that they would be unable to sell their shares, and the no net sales policy helped artificially inflate the price of the Sky Entities stocks. When trading in those stocks was suspended by the London Stock Exchange in 2006, the investments were rendered worthless.
The SEC alleges that Mandell enforced the no net sales policy by holding meetings with Sky Capital brokers to inform them that they needed to find buyers for the Sky Entities' stocks being sold by other Sky Capital customers to alleviate "selling pressure" on the stocks. Mandell told brokers that they had to find a buyer before the broker could submit a sell ticket.
According to the SEC's complaint, Mandell bullied brokers who submitted customer sell orders without first lining up a buyer, and accused them of not being a "team player." Mandell also denied perks to brokers who did not follow the no net sales policy. Sky Capital often paid for parking, cell phones, and other personal expenses incurred by the brokers. But if a broker did not "support the stock," Mandell would take away the broker's perks.
The SEC's complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and charges Shea with aiding and abetting the other defendants' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC's complaint also charges Sky Capital with violating Section 15(c) of the Exchange Act, and Mandell with aiding and abetting Sky Capital's violation of Section 15(c) of the Exchange Act. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Mandell from acting as an officer or director of any registered public company.