U.S. accuses six in $140 million trans-Atlantic scheme

NEW YORK (Reuters) - Six employees of Wall Street retail brokerage Sky Capital ran a $140 million "transatlantic boiler room" to defraud investors in the United States and Britain, authorities charged on Wednesday.

U.S. prosecutors announced a criminal indictment of securities, wire and mail fraud against Sky Capital founder, President and Chief Executive Ross Mandell, 52, and five others, while the U.S. Securities and Exchange Commission also filed civil charges.

All six surrendered to FBI agents on Wednesday and later appeared in Manhattan federal court and entered pleas of not guilty before being released on bond.

The SEC complaint said brokers raised $61 million between 2002 and 2006 from investors, but then enforced a policy that prevented them from selling their stocks in Sky Capital Holdings Ltd and Sky Capital Enterprises Inc (Sky Entities). They were publicly traded on the Alternative Investment Market of the London Stock Exchange until 2006.

"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," the SEC said. "When trading in those stocks was suspended by the London Stock Exchange in 2006, the investments were rendered worthless."

The SEC described the purported fraud as a "transatlantic boiler room scheme."

Apart from Mandell, of Boca Raton, Florida, other principals and employees charged were former Chief Operating Officer Stephen Shea, 37, of New York; Adam Harrington, 39, of Miami; Arn Wilson, 52, of Concord, North Carolina; Robert Grabowski, 41, of New York; and Michael Passaro, 46, of Delray Beach, Florida.

Mandell was released on a personal recognizance bond of $5 million secured by his Florida home and $25,000 in cash. Shea, Harrington, Wilson, Grabowski and Passaro were all released on $1 million bond each secured by property or cash.

Grabowski's lawyer, Bettina Schein, said he would defend the charges. She said his clients still invested with him and that they were "sophisticated and informed investors."

Shea's lawyer declined to comment. Mandell's lawyer and attorneys for the others could not immediately be reached.

The Office of the U.S. Attorney in Manhattan accused the men of enriching themselves with client money.

"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," the office said.

It said the defendants acted primarily from two successive securities broker-dealers, The Thornwater Company LP and Sky Capital LLC, raising some $140 million for the scheme between 1998 and 2006.

Calls to phone numbers listed for the New York brokerage went unanswered or were busy.

A published overview of the company said that Sky Capital Holdings, through subsidiaries such as Sky Capital LLC, provided financial services and products for international clients. It has another subsidiary, Sky Capital UK Ltd.

(Reporting by Grant McCool; Additional reporting by Karey Wutkowski in Washington; Editing by Maureen Bavdek and Richard Chang)