$140 Ponzi Scheme Carried Out in Two Successive New York-Based Broker-Dealers.

[ by Melanie Gretchen and Howard Haykin ]

Sky Capital RR Stephen Shea in 2011 pled guilty to conspiracy to commit securities fraud, mail fraud, and wire fraud. Last May, in Manhattan federal court, former CEO Ross Mandell was found guilty and sentenced to 12 years in prison in the case, United States v. Ross Mandell, et al.  This year, the SEC conduct the civil case against Shea, who also worked for Thornwater Company. 

Federal Findings and Allegations. Shea was an RR at The Thornwater Company, L.P. from 1997 to 2002, and an RR from 2001 to 2009 at Sky Capital (now known as Granta Capital LLC).  From 1998 through 2006, Shea, along with Adam Harrington, a/k/a "Adam Rukdeschel," Arn Wilson, Robert Grabowski, Michael Pasaro and ex-CEO Ross Mandell, participated in a scheme to defraud investors of $140 million under false pretenses, via the two successive broker-dealers.  Mandell was the leader.

Shea, a resident of Brooklyn, New York, 40, pled guilty for manipulating the market for certain affiliated companies’ stocks, failing to use investors’ funds as promised, and misappropriating and converting investors’ funds without their knowledge.  Instead, Shea and others enriched themselves, paid undisclosed commissions to brokers, and paid off earlier investors who had lost funds on prior purported investment opportunities.

Manipulating Secondary Market for SKH and SKE Stock.   For part of the scheme, the defendants and others manipulated the secondary market for SKH and SKE stock, principally to:  

• placate existing investors,
• induce firm customers to add to their investments in various investment vehicles at a "discount" from the price of the publicly-traded stock; and,
• enrich members of the scheme who had substantial holdings in Sky Capital.

The defendants used high-pressure sales tactics and materially false statements and omissions to induce investors to buy SKH and/or SKE stock.  Investors were discouraged from selling the stock by the firms's "no net sales" policy, whereby brokers were instructed not to accept SKH or SKE sell orders unless a matching buy order could be generated for another customer.  Crossing SKH and/or SKE stock among customer accounts helped them to maintain the market price, and to effect unauthorized purchases of SKH and/or SKE stock in retail customer accounts.

The manipulation was designed to make it appear that there was demand for SKH and SKE stock (when in fact there was not); to control the market in the stock; and to maintain and increase the share price. To facilitate the market manipulation, MANDELL, SHEA, and HARRINGTON offered excessive undisclosed payments to Sky Capital brokers, including HARRINGTON, WILSON, GRABOWSKI, and PASSARO. The payments were often disguised as "advances," "loans," or "special bonuses." To generate funds for these payments, participants in the scheme, at MANDELL's direction, created a "spread" on SKH and SKE stock by negotiating to purchase large blocks of Sky Capital stock from Sky investors at discounted prices and then soliciting other Sky customers to purchase the same Sky Capital stock at the higher price. The resultant profit was split between Sky Capital and the brokers.

Going forward, the SEC will determine (i) whether the allegations are true and (ii) whether to afford Shea an opportunity to establish any defenses to such allegations;  as well as (iii) whether any remedial action is appropriate in the public interest against Respondent pursuant to Section 15(b) of the Exchange Act; IV.  A public hearing shall be convened in the future, and before an Administrative Law Judge to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 C.F.R. § 201.110.

For further details, go to [SEC Release No. 69095, 3/8/13] and [FBI, 5/3/12].