SEC Brings Enforcement Action Against Kenneth Starr

May 27, 2010

The SEC charged Kenneth Ira Starr, a New York-based financial adviser, with fraud, alleging that he stole client money for his personal use.  The SEC further alleged that Starr and two entities he controlled – 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.

The SEC charged Starr and two other defendants with violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and, further, charged Starr Investment Advisors with violations of Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(1). The SEC observed that most investment advisers do not maintain physical custody of their clients' assets.  Instead, those assets are held by qualified third-party custodians such as a regulated bank or a registered broker-dealer.  In this case, the SEC stated 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. The SEC noted that 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.

According to the SEC, 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 New York. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr allegedly reimbursed that client with money siphoned from the account of another client without authorization. When confronted about this transaction, and other similar transactions,, the SEC stated that Starr gave improbable explanations before eventually reimbursing the client with money that appears to have come from the bank account of another unrelated party.

Click here to access the administrative action.


Categories

Enforcement Actions, Investment Advisers