Kenneth Starr, an investment adviser representative, to several celebrities and other wealthy clients, was arrested on May 27th for allegedly using client funds for his own personal use. Starr has been charged in a New York District Court with fraud by an investment advisor, a wire fraud scheme to obtain property, money laundering, false statements in an IRS Filing, and false statements to a federal officer, for fraudulently misappropriating over $30 million of client funds. The Complaint also charges Andrew Stein, an associate of Starr’s, with various tax fraud violations. (Click here for the full Complaint).
Starr, who is not the Kenneth Starr who served as the prosecutor in the Whitewater investigation, allegedly used his registered investment advisor firm, Starr & Company, LLC, to conduct the fraud. Through the investment advisor firm, Starr presented himself as an accountant and investment adviser representative to obtain management and control of over millions of dollars of client finds. In some instances, Starr assumed total control over his clients’ funds by collecting their earnings, paying their bills, and then investing their savings.
Starr allegedly transferred client funds to a trust account to make it appear as if the funds were being directed to investments. However, those funds were actually diverted to risky investments in which Starr had a financial interest or Starr would use the funds for his personal expenses, including the purchase of a condo on Upper East Side of New York City, for $7.5 million. When Starr’s clients made demands for payments, he would transfer funds from one client to another client. This behavior caused the Government to label Starr’s activity as “characteristic of a ‘Ponzi’ scheme.” If convicted, Starr faces up to 45 years in a federal prison.
This alleged Ponzi scheme involving a high profile registered investment advisor will undoubtedly increase regulatory scrutiny of other registered investment advisor’s custody practices and should serve as reminder to registered investment advisers of the need to address fully the requirements of the SEC’s new custody rule.
Posted by Bryan Hill
Labels: Criminal, Custody, Uncategorized
