U.S. Securities and Exchange Commission
Litigation Release No. 21541 / June 1, 2010
SEC v. Kenneth Ira Starr, Starr Investment Advisors, LLC, and Starr & Company, LLC, Civil Action No. 10 Civ. 4270 (SDNY)(SHS)
On May 27, 2010, the Securities and Exchange Commission filed an emergency civil injunctive action in the United States District Court for the Southern District of New York charging an investment adviser, his investment advisory firm, and his business management firm with securities fraud. The Commission alleged that Kenneth Ira Starr, Starr Investment Advisors, LLC (SIA), and Starr & Company, LLC (Starrco) violated the securities laws by, among other things, misappropriating client money.
According to the Commission's Complaint, Starr and SIA — an entity that Starr controls — provide investment advisory services to more than thirty high net-worth clients. In addition, Starr and Starrco — another entity that Starr also controls — provide advisory, accounting, tax preparation, business management, bill-paying, and "concierge" services to a larger but overlapping group of approximately 175 clients. Defendants have power of attorney or signatory authority over many bank and investment accounts belonging to their clients. The Commission's complaint charges that Defendants have abused the signatory power that they hold over their clients' bank and investment accounts by misappropriating client funds for their own purposes, including the purchase of a luxury $7.6 million Manhattan apartment for Starr.
Specifically, the Commission's complaint alleges that between April 13 and April 16, 2010, Defendants transferred $7 million from the accounts of three SIA and Starrco clients. The transfers from the accounts of the three SIA and Starrco clients were not authorized. These funds were ultimately used on April 16, 2010, to purchase an apartment in which Starr and Passage reside.
The Commission's complaint alleges additional instances, beyond those in April 2010, of where Defendants misappropriated client funds. Starting in August 2009, Defendants transferred approximately $1.7 million from the personal account of an investor and from the account of a charity run by that investor. These were all unauthorized transfers. In April 2010, Defendants attempted to transfer an additional $750,000 from one of that investor's accounts but the bank notified the investor, who halted the transfer. When that investor confronted Defendants over these transactions, Defendants paid the investor back with money that again appears to have come from the bank account of another unrelated party.
According to the Commission's complaint, the Defendants' ability to misappropriate client funds was enhanced by SIA's failure to comply with custodial rules. Indeed, SIA failed to engage an independent public accountant for the years 2006-2009 to perform a surprise examination of its advisory clients' assets over which Defendants had custody. Moreover, certain assets of SIA clients were held in a physical form in a safe in Starrco's offices despite the fact that none of Defendants are qualified custodians.
The SEC's complaint charges each of the defendants with violations of Section 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act). The Complaint charges SIA with violation of Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(1) thereunder. The Commission also named Starr's wife, Diane Passage, and Colcave, LLC, an entity that Starr used to buy the apartment, as relief defendants. The Commission's complaint seeks emergency relief including temporary restraining orders and preliminary injunctions, and an order: (i) imposing asset freezes against the Defendants and the Relief Defendants; (ii) appointing a Receiver over SIA, Starrco, and Colcave; (iii) allowing expedited discovery against Defendants and the Relief Defendants and preventing the destruction of Defendants' and Relief Defendants' documents; (iv) requiring that Defendants and Relief Defendants provide verified accountings; (v) repatriating funds transferred by Defendants and Relief Defendants to foreign accounts and the freezing of such funds; (vi) imposing a constructive trust over the apartment purchased by Colcave in which Starr and Passage reside; and (vii) enjoining the Defendants and Relief Defendants and any third party from filing bankruptcy on behalf of the Defendants and Relief Defendants without leave of the Court and notice to the Commission. The Commission seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest on a joint and several basis and civil monetary penalties against all of the Defendants. The Commission also seeks an order requiring that Relief Defendants disgorge all assets of Defendants' clients that improperly were transferred to them, together with prejudgment interest, including, but not limited to, the apartment purchased by Colcave in which Starr and Passage reside.
The case has been assigned to the Honorable Sidney H. Stein of the United States District Court for the Southern District of New York. Upon the Commission's application, Judge Stein granted all the relief sought by the Commission except for the immediate appointment of a receiver. Judge Stein ordered a hearing to be held on June 1, 2010 to consider the appointment of a monitor. He further ordered that a hearing be held on June 10, 2010 to consider the Commission's request for a preliminary injunction and the appointment of a receiver.