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.

The Securities and Exchange Commission (SEC) worked closely with the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation (FBI) to stop a Walt Disney Company employee and her boyfriend from an attempt to establish an ongoing insider trading business.

On May 26, 2010 Bonnie Jean Hoxie, an administrative assistant to a high-level Disney executive, and her boyfriend Yonni Sebbag, were charged with violating the anti-fraud provisions of the federal securities laws. Hoxie and Sebbag allegedly offered to sell and sold material non-public information to be used for the purpose of insider trading.

Hoxie allegedly had regular access to confidential information concerning Disney’s financial performance and operating plans. The Disney employee then allegedly provided the information to her boyfriend.

According to the SEC complaint, in March 2010 the couple sent anonymous letters to more than 20 hedge funds in the United States and Europe, offering to “provide pre-release results of Disney’s second quarter 2010 earnings in exchange for a fee.”

The SEC was alerted by several hedge funds of the suspicious letters they had received, which led to an undercover operation by the FBI.

According to e-mails to FBI agents posing as investment managers, Sebbag allegedly said that he wanted to form a “strong business relationship…for future quarters and information,” and discussed payment for providing the information. Then two days before Disney publicly announced its earnings, Sebbag allegedly e-mailed the undercover agents a 107-page confidential document containing very detailed information about the quarterly performance and future prospects of Disney’s various businesses.

The SEC also alleges that “Hoxie learned that Disney’s Earnings Per Share (EPS) for the quarter and provided that information to Sebbag, who in turn provided it to an undercover agent approximately two hours before its public release.”

Sebbag allegedly met with the undercover agent on May 14, 2010 to receive payment for the inside information in the amount of $15,000 in cash. Sebbag and Hoxie were arrested by the FBI on May 26, 2010.

Over a year ago Attorney Javier Cremades helped organize 60 law firms from 25 countries outside of the United States, to represent investors from Europe, Latin America and Israel defrauded by the Bernard Madoff Ponzi scheme. On May 25, 2010, the founder of the Madrid law firm Cremades & Calvo-Sotelo announced to the press that over the past year, 720,000 of the investors represented by the firms have settled with their banks.

The $15.5 billion in settlements has helped repay 100 percent of the amount the clients had invested but typically did not include the phony paper gains that were listed on investor statements. Many of the settlements also included provisions that require clients to keep their money at the bank for several years. The estimated 20 banks are reportedly located in France, Spain, Portugal and Germany.

The majority of settlements came from commercial European banks and other global institutions through which investor funds were channeled into the multi-billion dollar Madoff Ponzi scheme. Unlike the majority of United States victims, who invested through money managers, midsize accounting firms and independent investment advisors, whose pockets don’t run as deep.

Verlin Swartzendruber was indicted by a federal grand jury in 2006, arrested in Laredo, Texas in 2008, and on May 28, 2010 he pleaded guilty to one count of fraud. The Texas man was accused of defrauding investors mainly from North Dakota, South Dakota and Minnesota, in a bank trading scheme he ran from St. Vincent and Grenada, in the West Indies, under the name Joseph Severin.

According to court documents, Swartzendruber is accused of soliciting between $14 million and $16 million from more than 500 investors. He allegedly told investors that he had unique access to international trading programs that would generate high rates of returns, and paid promoters to recruit investors.

Swartzendruber was originally charged with 11 felony counts of wire fraud, money laundering and conspiracy to defraud the United States. In exchange for his guilty plea, prosecutors dropped the other charges. The plea reduces his potential prison time from 115 years to no more than 5 years following his August 3, 2010 sentencing.

Under the conditions of the plea agreement, Swartzendruber will forfeit $10 million and pay about $1 million in restitution. The agreement allows his wife to keep a motor home, a vehicle, a fishing boat, her Social Security income and part of the proceeds from the Strawberry Lake Christian Bible Camp the couple manages over the summer.

The investigation began ten years ago when a complaint was filed with the North Dakota Securities Commission.

MICG Investment Management LLC was shut down by the Financial Industry Regulatory Authority (FINRA) May 12, 2010 for failing to meet its net capital requirement. On May 14, 2010 FINRA filed a suit against the brokerage firm and its chief executive and majority owner, Jeffrey A. Martinovich, for committing securities fraud in its management of the hedge fund MICG Venture Strategies LLC.

MICG and Martinovich allegedly misused investors’ funds and issued false account statements to investors.

According to FINRA’s complaint, MICG and Martinovich improperly assigned excessive asset values to two non-public securities owned by the hedge fund. They allegedly boosted the value of 1.8 million shares of EVP Solar Inc. stock from $1.15 to $2.13 per share just 6 months after MICG purchased the stock. Also, the hedge fund’s interest in the shares of an English soccer club, Derby County FC, was allegedly increased to $7.6 million just one year after purchasing the shares at $5 million.

MICG and Martinovich used those inflated valuations to wrongly charge management and incentive fees of almost $1 million between 2007 and the beginning of 2010.