A new Star(r) in the Wall Street's hall of shame

Kenneth Ira Starr was arrested in May 2010 for a fraudulent scheme he ran for about a year and through which he had been able to misappropriate over $9 million from his advisory clients.


According to the claim brought by the SEC against him, Starr prior to his arrest managed over $700 million through Starr Investment Advisors LLC on behalf of around thirty high net worth clients.

The scheme was made possible since Starr had power of attorney or signatory authority over many banks and investment accounts belonging to his clients. Furthermore, Starr had custody of some of his clients’ assets also he was not a qualified custodian. Moreover, certain clients’ assets were held in a physical form in a safe at Starr’s office.


In order to avoid detection of the misappropriation scheme, Starr has been able to rely on the complicity of Jonathan Star Bristol (another star!!!), an attorney at an international law firm, who allows him, from November 2008, to funnel some of his clients’ assets through his attorney trust accounts. Bristol was the sole owner of those accounts. Bristol would then send the money deposited on his accounts to Starr related parties also he knew that it was belonging to Starr clients.

According to the SEC’s complain, the scheme started in August 2009 and comprise many illegal transfers from clients’ money. It culminated in April 2010, with the transfer of $7 million from three different client’s accounts to found Starr’s purchase of a luxury Manhattan apartment.

Also some of the clients noticed the illegal transfers from their accounts and Starr had to return some of the stolen money, he still had been able to perpetrate the scheme for almost a year and to steal several millions for his own personal use.

If investors needed a reminder, this case highlights again the danger of self-custody of clients’ assets by an asset manager. The SEC stressed in his complain that in order to hold assets a custodian need, among other obligations, to be registered and to engage an independent public accountant to perform surprise examination of its clients’ accounts. Furthermore, if an advisor is not an authorized custodian, he has the fiduciary duty to deposit his clients’ assets with authorized parties.

Managed accounts are providing extra security versus a fund structure only if those accounts are structured properly and monitored by the clients. Attorney power should never be granted to the investment manager and transfers over a certain amount have to be authorized by the account owner. Furthermore, the client need the skills and tools to monitor the account, the era of blind trust is over today you need to “trust but verify”. It should be stressed that complicity is very difficult to detect and has been unfortunately used in several other fraud cases. Thorough due diligence is a must but you should also remember the wise advise of not putting all your eggs in the same basket.

Source:
SEC Press release:http://sec.gov/news/press/2010/2010-248.htm
SEC Complain: http://sec.gov/litigation/complaints/2010/comp21782.pdf