SEC Files Emergency Charges Against New York-Based Financial Advisor for Defrauding Clients
FOR IMMEDIATE RELEASE
Washington, D.C., May 27, 2010 — The Securities and Exchange Commission today charged Manhattan-based financial advisor Kenneth Ira Starr with fraud and is seeking an emergency court order to freeze his assets after he stole client money for his personal use, including the purchase last month of a multi-million dollar apartment where he and his wife now reside.
The SEC alleges that Starr and two entities he controls — Starr Investment Advisors LLC and Starr & Company LLC — have made unauthorized transfers of money in client accounts that ultimately wound up in Starr’s personal accounts. They violated securities laws pertaining to investment advisers in order to perpetrate the scheme.
Most investment advisers do not maintain physical custody of their clients’ assets, and those assets are instead held by qualified third-party custodians such as a regulated bank or a registered broker-dealer. In this case, the SEC alleges that certain client assets were held in a safe in Starr & Company’s offices despite the fact that Starr and his firms were not qualified custodians. Their ability to steal client funds was enhanced by the failure of Starr Investment Advisors to comply with asset custody rules that require firms to engage an independent public accountant to perform yearly surprise examinations of client assets in the firm’s custody.
“Starr breached his fiduciary duty as an investment adviser in the most egregious manner possible — he stole the funds his clients entrusted to him,” said George Canellos, Director of the SEC’s New York Regional Office. “Starr betrayed the trust of some clients who have looked to him for years for investment advice and financial guidance.”
According to the SEC’s complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without authorization. The other two investors have not been reimbursed.
The SEC’s complaint alleges that the unauthorized transfers in April 2010 were not the only instances when Starr misappropriated client funds. In August 2009, Starr and his entities began transferring approximately $1.7 million from the personal account of a client and from the account of a charity run by this client. These were all unauthorized transfers. In April 2010, an additional transfer of $750,000 was attempted from an account belonging to this client. But this time, Starr’s plans were frustrated because the bank alerted the client, who then halted the transfer. The client then reviewed the account transactions and uncovered the unauthorized $1.7 million transfers in 2009. When confronted about these transactions, Starr gave improbable explanations before eventually reimbursing the client with money that appears to have come from the bank account of another unrelated party.
The SEC’s complaint names two relief defendants in order to recover client assets now in their possession:
- Diane Passage — Starr’s wife with whom he has a joint bank account.
- Colcave LLC — An entity through which Starr purchased the apartment.
The SEC’s complaint charges each of the three defendants with violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and, further, charges Starr Investment Advisors with violations of Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(1) thereunder. In addition to the emergency relief, the SEC’s complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants’ and relief defendants’ ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants.
Sanjay Wadhwa, Robert Murphy, Timothy Casey, Sandeep Satwalekar, and George O’Kane of the New York Regional Office conducted the SEC’s investigation, which is continuing. The SEC’s litigation effort will be led by Todd Brody. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, the New York County District Attorney’s Office, and the New York Office of the Internal Revenue Service’s Criminal Investigation Division for their assistance in this matter.
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For more information about this enforcement action, contact:
George S. Canellos
Director, SEC’s New York Regional Office
Assistant Director, SEC’s New York Regional Office