Red Flags in the Sky


“He that voluntarily continues in ignorance, is guilty of all the crimes which ignorance produces”
– Samuel Johnson

If Bernie Madoff was the Harlem Globetrotters of stock fraud (undefeated for decades), then Ross Mandell and his Sky Capital crew are the Washington Generals.  Mandell has been in trouble with regulators and officials on and off for almost 20 years, but only during the liquidity binge of the middle of this decade could he have pulled off anything on this scale.

From the Financial Times:
Six former executives and brokers of Sky Capital, a New York brokerage, have been charged with a $140m transatlantic “boiler-room” fraud that law enforcers say reeled in UK and US investors.

The stock manipulation was allegedly designed to make it appear there was demand for the shares (of Sky Capital), to control the market and to maintain and increase the share price, Sky Capital enforced a “no net sales” policy that in essence prevented investors from selling their stocks, the SEC alleged. When trading in those stocks was suspended, the investments were rendered worthless.

The funny/ tragic part of this scam is that it is literally one of the oldest forms of stock fraud in the book.  This “no net sales” thing was exactly what all the Stratton Oakmont offspring firms went down for in the 90’s.  Busting this BS up was a win for the good guys and will probably be a paint-by-numbers prosecutorial effort, too.

If the name Stratton Oakmont doesn’t ring any bells, they were the archetypal boiler room operation, the one that the film Boiler Room was actually based on.  Stratton’s acolytes scattered across the New York metro area and down to Florida when it was shut down, like Shaolin Monks sent out of their mountain sanctuary to teach the principles of true Kung Fu.  Except what they taught was the despicable Market Making/ No Net Sales scam that Sky Capital apparently attempted to resurrect in a new format.

The No Net Sales scam is disgusting and easy to spot, and if Mandell’s troops start with that “Just Following Orders” schtick, I’d hope the jury heeds the words of the band Thin Lizzy:  Don’t Believe a Word.

To call these guys “brokers” is an insult to the profession, especially now, at a time when brokers and advisors have actually been one of the few components of the Wall Street engine that have held their own during the meltdown.

If you are serving as a Registered Rep in the brokerage industry, then presumably you’ve at least passed the required exams and can fog a mirror.  If your brain was functioning correctly,  then there were several red flags that you should have picked up along the way, telling you that you’ve been engaged in something immoral and illegal:

  • Red Flag #1:  You are told by a manager or owner of a brokerage firm what stock you must buy for your customers.
  • Red Flag #2:  You may be paid a higher commission for buying that stock over another.
  • Red Flag #3:  Your firm makes a market in that stock (holds it’s own inventory of shares) or holds some other financial interest in it (in Sky’s case, they controlled the companies themselves).
  • Red Flag #4:  You are subjected during firm-wide meetings to harangues about how much of an opportunity the stock presents.
  • Red Flag #5:  There are sales contests that incentivize you to buy that particular stock rather than to achieve more general goals.
  • Red Flag #6:  You are told that before you are allowed to sell any shares of that stock (even if you have an order from your client to sell), you must first find a client who will buy an equal or greater amount of it (otherwise known as a cross).
  • Red Flag #7:  When entering an order for that stock, your firm’s trader deliberately fills you at the top asking price so as to create the illusion of demand.
  • Red Flag #8:  The chart of the (typically thinly-traded) stock shows a massive spurt of volume and buying roughly a few weeks before the stock is brought to the brokers’ attention (this would represent the firm’s principle account and it’s collaborators’ own purchases in preparation for the pump they will orchestrate).
  • Red Flag #9:  You are treated differently from other reps at the firm based on who buys the stock and who doesn’t “help the team”.  Bizarre perks abound, like bill-paying, dinners, sports tickets and comped trips to strip clubs for those who “support the stock”.
  • Red Flag #10:  Your wealthy clients are taken from you and redistributed or contacted directly by the firm’s owner if you do not “get them involved” with the stock on your own.

The 10 red flags discussed above should have been ample enough warning to any of the brokers who sold the “house stock” to their clients or refused sell orders for that matter.  Those who participated cannot reasonably mount the Nuremberg Defense against DA Robert Morganthau and his staff, as they’ve been busting up the No Net Sale scam for decades.

It’s been remarked on other websites that seeing a fraud busted up that is only in the hundreds of millions as opposed to the billions of dollars is reassuring, because it means that the authorities are not letting the little ones slide while they ratchet up investigations of the big ones.  I agree with this assessment, as I am a big believer in the Broken Windows policies that helped to clean up New York City’s crime stats in the 90’s.

Good riddance, schmucks.  Hope it was worth it.


Sky Capital Staff Face $140 Million Fraud Charge (FT)

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