The securities industry has heard numerous stories about troubled private placements that were offered to investors in the early years of the 21st century, including Medical Capital, Provident and DBSI. In recent years, numerous REITs have also been the subject of regulatory enforcement actions and continued FINRA arbitrations, such as Inland American REIT and Inland Western REIT. Recently, however, Investment News reported on criminal sentences imposed upon two brokers found guilty of defrauding investors of more than $140 Million through less-known alternative investment opportunities.
According to Investment News, Adam Harrington and Ross Mandell of Sky Capital Holdings Ltd., were sentenced to five and twelve years in prison, respectively, for their role in defrauding investors nationwide with private placements in Thornwater LP and Sky Capital Holdings Ltd. According to the report, Harrington and Mandell misled investors with false information and manipulated stock prices by bribing brokers recommending investments into Thorwater and Sky Capital to their clients. While Mandell was the founder of Sky Capital, Harrington was just a broker who, according to U.S. District Court Judge Paul Crotty, “was more than a foot soldier.” Although investor fraud is unfortunately too common in today’s market, the details of this story are unusual for many reasons.
The most unusual aspect of this case is the imposition of criminal sanctions against Harrington and Mandell. Although other high-profile investment products such as Medical Capital and Provident either have or will likely result in criminal sentences, the amount of funds invested in those schemes exceeded $1.0 Billion, as compared to the $140 Million at issue in this case. Furthermore, not all fraudulent investment schemes result in criminal sentences, but rather are the subject of numerous FINRA arbitration claims and regulatory enforcement actions by the states, FINRA and/or the SEC. Unlike many of the other cases, however, the jury in this case heard recordings obtained by the FBI, in which Mandell told brokers, “You have to lie, you have to paint a rosy picture. That’s your choice.” If this and other incriminating recordings did not exist, the likelihood of criminal prosecution would have been significantly reduced.
Another unusual aspect of this case is the criminal prosecution and sentence of Harrington, a non-owner / non-founder of Sky Capital. In cases in which criminal prosecution occurs as a result of investment fraud, the target of that prosecution is likely the owner / founder of the entity in which investments were made. It is unusual, however, to see criminal prosecution of brokers recommending the investments to other brokers and/or investors. Much like the recordings of Mandell, however, the likelihood of similar incriminating evidence against Harrington is great. If the government’s only allegations against Harrington were that he failed to properly disclose the private placements to investors and recommended Sky Capital and Thornwater to unsuitable investors, the likelihood of criminal prosecution and sentencing would have declined.
The one aspect of this case that will likely be similar to many other cases involving fraudulent investments through private placements, is an abundance of FINRA arbitration claims against the registered representatives and broker / dealers that recommended Sky Capital and Thornwater investments to their clients. Although some people may have been fraudulently advised to invest in Sky Capital and Thornwater despite a lack of suitability, some investors may have been fully aware of their investment risks and nonetheless chose to invest in Sky Capital and Thornwater as a suitable alternative investment opportunity.