Ross Mandell set down his glass and smiled. The self-confessed bad boy of Wall Street couldn’t believe his luck.

From his seat in the Cholmondeley Room, the most sought-after dining venue in the House of Lords, the fast-talking New Yorker with a murky past surveyed the scene. Before him 120 clients, investors and friends of Sky Capital, his broking firm, tucked into lunch.

After milling on the terrace overlooking the Thames, they had listened to warm words of welcome from their host, Lord Kenilworth, followed by a short speech from one of Mandell’s PR pals who had flown in from New York to praise him as a “wonderful family man”.

Who could doubt the reformation of Mandell – a former cocaine addict who paid numerous fines and was suspended for six weeks from securities dealing in 1995 after complaints from clients? He didn’t even drink anymore, preferring an orange and cranberry juice or endless espressos to give him a natural high.

That lunch, which took place in May 2005, seemed a world away last week when Mandell and five colleagues were arrested by the FBI on charges of running a “boiler room” investment fraud that swindled investors, up to 400 of them in Britain, out of $140m (£86m) over eight years.

After a three-year investigation aided by the Serious Fraud Office and the Financial Services Authority, Mandell, 52, pleaded not guilty and was released on $5m bail.

“This firm and these brokers went to great lengths to lie repeatedly to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares,” said James Clark-son, acting director of the Securities and Exchange Commission’s New York regional office.

Mandell came to London in 2001. Less tightly regulated than some of its international peers, the Alternative Investment Market (AIM) seemed the ideal place to list.

He and his team “suffered from a bad reputation in New York because of what had gone before”, said one ex-employee.

Armed with the help of Grant Thornton, its nominated adviser, Sky Capital – Mandell’s daughter is called Sky – set about recruiting credible nonexecutive directors.

Even so, the prospectus to its 2002 listing revealed that the National Association of Securities Dealers in the US was only letting Sky Capital operate as long as Mandell promised not to be involved personally in its running. That instruction proved impossible for the former high school wrestler to stick to.

“I have no reason to believe he was crooked, just difficult to deal with,” said Alexander Duma, the former head of corporate finance at Chase and BZW who joined the board. “We looked at his chequered history pretty closely and everything did seem to be water under the bridge.”

Matthew Carrington, former MP and chairman of the Commons Treasury committee during the Barings Bank probe, described Mandell as “a very charming man”. He was also recruited, as was Larry Pressler, a former US senator. Mandell had always worked hard to engage the support of politicians, raising funds for Eliot Spitzer’s run for New York governor in 2004.

To obtain a dealing licence, Sky Capital bought a small broking firm, Everett Financial, based in Wandsworth, south London, for £1.6m. It was rebranded and moved to the Square Mile, ousting the founders soon after.

Mandell and his team based themselves at the Dorchester, where he often took one of the hotel’s top suites for a fortnight at a time. “There were lavish plates of food,” said one insider. “Most of it got sent back.”

Mandell used the hotel’s impressive surroundings as a backdrop for meeting new clients. At any one time, his entourage, always in immaculate pin-stripe suits, might have occupied five tables in the Dorchester’s atrium.

The FBI refers to “high-pressure sales tactics” that included discouraging investors from selling Sky Capital stock and instructing brokers not to accept sell orders unless they could find matching buyers.

“The investment was not for widows and orphans and never pitched as such,” said Carrington. “It was only really appropriate for sophisticated investors.”

Sky Capital later added a ventures arm, Sky Capital Enterprises. One of its investments was a company that produces “micro-manipulators” to treat bad backs. Mandell, who had long suffered with back pain, was a vocal supporter of the products’s healing power. Through Lord Kenilworth, Mandell was introduced to Lord St John of Bletso, a fellow hereditary peer. Kenilworth, also known as Randle Siddeley, a landscape architect, declined to comment. “I was quite interested in the product because I have had lower back problems for some time,” Bletso said.

Mandell asked him to become a consultant to the firm but Bletso declined, instead agreeing to host an event for Sky Capital at the House of Lords. A drinks party in October 2004, also in the Cholmondeley Room, preceded the lunch the following spring. Bletso insists he had no financial link to Sky Capital.

By 2006, losses were mounting and Sky Capital was struggling. Concerned that Mandell’s spending on hotels and entertainment was out of control, directors flew to New York for a showdown. Senior managers were angling to replace him with Michael Recca, his long-time deputy.

Instead, it was Recca who ended up leaving the business, swiftly followed by several of its nonexecutives. An FBI raid on the New York office signalled the beginning of the end and trading in Sky Capital’s AIM-listed shares was halted.

As he faces two counts of fraud that carry a 25-year prison sentence, Mandell’s associates are beginning to question the trust they put in him. “If there was criminal activity going on it, it was concealed from everybody,” said Carrington, who resigned in 2004.

“I suppose I shouldn’t have done it,” Bletso said of the House of Lords events. “It was rather silly and I should have been more discerning.”

Hundreds of British investors, blinded by the sharp suits and promise of riches, must agree.

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