Wire tap tapes proved the undoing of jailed hedge fund mogul Raja Rajaratnam who is serving eleven years for insider trading. Audio tapes from the FBI also helped convict and send to prison for former brokerage CEO Ross Mandell and one of his key assistants, Adam Harrington. U.S. v. Mandell, 09-cr-00662 (S.D.N.Y.).

Mr. Mandell is the former CEO of brokerage firm Sky Capital, LLC, and its related companies. He also controlled The Thornwater Company, L.P. Mr. Harrington was an important assistant, having managed the Sky New York office. From 1998 through 2006 Mr. Mandell and others participated in a scheme to induce investors to purchase Thornwater and Sky Capital related private placement interests. Mr. Harrington worked for Sky from 2000 through 2005. The scheme is alleged to have defrauded investors out of about $140 million.

Investors were induced to purchase the shares through claims that they were being acquired at a discount to the market price. What investors were not told is that the market price was manipulated by Mr. Mandell and others. Brokers at Sky were directed by Mr. Mandell to manipulate the share price. As part of the scheme the brokers were told not to permit investors to sell the shares unless they had a matched order. Through this mechanism they were able to maintain the share price which was critical to the scheme.

Brokers at Sky were paid excessive, undisclosed commissions to implement the scheme. In some instances those commissions were as much as 400% of the normal compensation. To raise portions of the money for those commissions, Mr. Mandell used the spread obtained from transactions involving the purchase and sale of certain large blocks of Sky Capital stock. Specifically, as part of the scheme brokers induced certain investors who held large blocks of Sky stock to sell them at a discount. Those blocks were then resold at a higher price to other investors. The spread on the transactions was used in part to pay the commissions to the broker executing the manipulation. Other potions of the money went to Sky.

During the trial jurors heard recordings made by the FBI. On one Mr. Mandell instructed brokers that “[y]ou have to lie, you have to paint a rosy picture. That’s your choice.” He also told the salesmen that “If Sky goes belly up, were’ all going to be embroiled in a big scandal . . . There will be no one, no one that’s safe,” according to a Bloomberg report.

Portions of the investor funds were channeled to Mr. Mandell. Other portions were used to pay part of the excessive broker commissions. Still other portions of the investor funds were used to repay other investors as the scheme continued.

Following a five week trial in July 2011 Messrs. Mandell and Harrington were found guilty by a jury of conspiracy, securities fraud, wire fraud and mail fraud. Both were sentenced last week. Mr. Mandell received a twelve year prison term and ordered to forfeit $50 million. Mr. Harrington was sentenced to serve five years in prison.

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