Brokers Plead Guilty to Stock Fraud Scheme

Jack Humphrey, Regulatory journalist
January 31, 2011 /

Two brokers who formerly worked for Sky Capital LLC have pleaded guilty January 29 to a $140 million stock fraud scheme with other broker-dealers who denied involvement in the criminal misconduct.

In 2009, the Securities and Exchange Commission has charged Michael Passaro, Arn Wilson and three others including Robert Grabowski, who served as president of Thornwater Company LP in which the two brokers had worked for to deceive investors in a wire and mail fraud from 1998 to 2006.

The SEC alleged that Passaro and Wilson had used a “boiler room” sales tactics to mislead investors and manipulated the shares in two Sky Capital companies that were traded on the Alternative Investment Market of the London Stock Exchange through mail and the phone.

In 2006, the London Stock Exchange suspended the trading, making the investments worthless, the SEC added.

“I agreed with other people at those firms to engage in criminal misconduct. I sold securities and tried to raise private money by knowingly making material misrepresentations and telling lies to potential investors,” said Passaro.

Wilson said he and the rest of the defendants had manipulated the spread for Sky Capital securities so that investors who bought stocks from the firm had paid an inflated price.

Passaro and Wilson also received undisclosed commissions from the stock fraud scheme, the SEC said.

The defendants included Ross Mandell, chief executive officer of Sky Capital units who is scheduled to go on trial March 14 before Crotty, Stephen Shea, Sky Capital’s president and chief operating officer, and Adam Harrington, a former Sky Capital broker. The three have not pleaded guilty to the stock fraud scheme before a federal court in New York, but will face 65 years of imprisonment if proven guilty.

The six had raised at least $61 million in the stock fraud scheme from 2002 to 2006 that prevented the investors from selling their shares because of a “no net sales” policy implemented by Sky Capital, the SEC said.

Passaro and Wilson agreed to disgorge their ill-gotten profits from the stock fraud and pay their income tax from undisclosed funds.

 

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