July 8 (Bloomberg) -- Six former Sky Capital LLC executives and brokers were indicted by a federal grand jury in what prosecutors said was a $140 million stock fraud.

The six, including Ross Mandell, chief executive officer of Sky Capital units, were accused of manipulating shares in two Sky Capital companies traded on the Alternative Investment Market of the London Stock Exchange.

“The manipulation was designed to make it appear that there was more demand” for the stock of the two companies “when in fact there was not,” Acting U.S. Attorney Lev Dassin in New York said today in a press release.

Along with Mandell, 52, prosecutors charged Stephen Shea, 37, Adam Harrington, 39, Robert Grabowski, 41, Michael Passaro, 46, and Arn Wilson, 52. They’re accused of conspiracy and securities fraud, which carry a combined maximum of 25 years in prison.

The six were taken into custody by the Federal Bureau of Investigation.

“Mr. Harrington engaged in absolutely no improper conduct during his tenure at Sky,” his lawyer Michael Bachner said in an interview. Defense attorney Bettina Schein said Grabowski pleaded innocent and continues to work with some of the same clients who the government claims he cheated.

Jeffrey Hoffman, a lawyer for Mandell; Steven Kartagener, the lawyer for Passaro; Julie Clark, a lawyer for Shea; and Bob Soloway, an attorney for Wilson, didn’t immediately return calls.

Prosecutors’ Allegations

The fraud took place mainly through Sky Capital’s offices in lower Manhattan, prosecutors said. Authorities said they pulled off the scheme using two successive broker dealers: the Thornwater Co. LP and Sky Capital LLC.

“To facilitate the market manipulation, Mandell, Shea and Harrington offered excessive undisclosed payments to Sky Capital brokers, including Harrington, Wilson, Grabowski and Passaro,” Dassin said in his release.

Separately, the Securities and Exchange Commission today filed civil charges in the case. The agency said the six raised more than $61 million in a so-called boiler room scheme that restricted investors from selling their shares.

Sky Capital allegedly raised the money from September 2002 to November 2006, implementing a “no net sales” policy that prevented investors from selling their stocks in two Sky companies, the SEC said in a statement. When trading in those stocks was suspended by the London Stock Exchange in 2006, the investments were rendered worthless.

Boiler Rooms

“Boiler-room tactics like those used by Sky Capital and its brokers undercut the level of honesty and fair play we seek to maintain in the securities markets,” said James Clarkson, acting director of the SEC’s New York regional office. “This firm and these brokers went to great lengths to repeatedly lie to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares.”

Boiler rooms typically mount aggressive sales campaigns by cold-calling prospective investors, often touting worthless stocks by suggesting they may recover their value, according to the SEC’s Web site.

The criminal case is U.S. v. Mandell, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

Last Updated: July 8, 2009 17:46 EDT