Securities Law Blog

Investment advisor to many well-known celebrities and high-profile clients, Kenneth Ira Starr, was arrested by federal prosecutors in New York May 27, 2010 on charges of fraud, money laundering and lying to a federal officer. The Securities and Exchange Commission (SEC) has also charged Mr. Starr with securities fraud.

Starr allegedly used two entities, Starr Investment Advisors LLC (SIA) and Starr & Company LLC, to make unauthorized transfers of money in client accounts that directed funds into Starr’s personal accounts.

According to the SEC’s complaint, Starr and his companies acted as a “self-clearing” adviser. Starr allegedly held certain clients’ assets in a safe in Starr & Company’s offices, even though the firms were not qualified custodians. Starr and SIA allegedly used their power of attorney or signatory over a number of client bank accounts to transfer money from one client’s account to another.

Between April 13 and April 16, 2010 Starr allegedly transferred $7 million from three client accounts without authorization. One client detected the unauthorized transfers and demanded the money be returned. Starr allegedly repaid the client with money siphoned from another client’s account without authorization.

The $7 million in transferred funds allegedly went towards Starr’s purchase of a $7.6 million apartment on the Upper East Side in Manhattan, according to the SEC.

In another instance, Starr began transferring approximately $1.7 million from a client’s personal account and the account of a charity run by the same client in August 2009. The fraudulent transfers went undetected until Starr tried to make a $750,000 transfer from this client’s account in April 2010. The client was notified by the bank and uncovered the previous $1.7 million in unauthorized transfers after a review of the account statements. The client was eventually reimbursed with money that appeared to have come from the bank account of another unrelated party, according to the SEC complaint.

According to SEC findings, from 2006-2009 Starr failed to comply with custodial rules that require an independent public accountant to perform yearly random examinations of client assets in a firm’s custody.

Prosecutors are also accusing Starr of stealing client funds through the operation of a Ponzi scheme. Starr allegedly solicited investments in what he claimed were sure deals, then diverted funds to himself, associates or towards his own risky business investments.

According to the FINRA BrokerCheck website, the SEC began its “fact-finding inquiry” on July 23, 2009.