Jun 8th 2010
Being rich and famous does not necessarily make you smart. That could be why so many wealthy people trust the untrustworthy.
Kenneth Ira Starr – not to be confused with Ken Starr, the investigator who prosecuted Bill Clinton in the 1990s – has been arrested on charges he took $30 million from clients in an elaborate Ponzi scheme.
Starr, 65, is a Manhattan resident who was a financial guru to such people as Dianne Sawyer, Jack Nicholson, Sylvester Stallone, Ron Howard, Annie Leibovitz, Wesley Snipes, Martin Scorsese, and former Secretary of State Henry Kissinger. If the charges are true, it’s bad enough that he defrauded clients who put their faith in him. But, according to the criminal complaint, nearly half of the money stolen, $13.88 million, was pilfered from a man Starr called a close friend.
Jacob the Jeweler
Jacob Arabo, better known in the entertainment industry as Jacob the Jeweler, is a creator of extravagant jewelry pieces for celebrities, including many rap stars. What’s more, the name Jacob the Jeweler can be heard in dozens of rap songs. The day after Starr and Arabo first met at a charity event, Starr bought a $70,000 watch from Arabo’s store. The two men quickly became friends. Over time, Starr’s purchases from Arabo totaled more than $400,000.
In 2006, when Arabo was arrested on money laundering charges, he pleaded guilty to a lesser charge and was sentenced to 30 months in prison. He looked to his friend and financial advisor, Starr, for assurance that his money would be safeguarded and invested in a way that would provide for his wife. Starr assured Arabo that his wife would be rich. Based on their friendship, Arabo turned over $13.88 million to Starr, and even signed documents concerning the investment without first reading them.
Soon after Arabo reported to prison in January 2009, his wife noticed some discrepancies in their financial records. Requests for information from Starr went unanswered, and her demands to have her money returned were ignored. Frustrated, Arabo and his wife began recording conversations with Starr, which they eventually turned over to federal authorities, leading to a federal probe that ended with charges brought against Starr.
Prior to his arrest, Starr controlled three companies: Starr Investment Advisors LLC, Starr & Company, LLC, and Colcave LLC. His companies manage combined assets of more than $700 million. According to charges brought by the Securities and Exchange Commission, Starr made unauthorized transfers from client accounts, which found their way into his personal accounts. The SEC says those actions violated securities laws that pertain to investment advisors.
Now, Starr is facing charges of money laundering, wire fraud, and investment advisor fraud. Also accused in the scam is Andrew Stein, the former borough president of Manhattan, who prosecutors say helped Starr commit fraud.
The SEC complaint points out that Starr is an attorney who used his power of attorney or signatory authority over client accounts to bilk funds from those clients, transferring the money into his personal accounts. He had physical custody of client assets, they said, which is unusual. He kept some of their cash in a safe in his office, although, the SEC pointed out, he was not a qualified custodian of those assets.
Specifically mentioned by the SEC is Starr’s transfer on April 13 of $1 million from the account of Investor No. 1. When that investor noticed and complained, the charges state Starr repaid the money with funds from the account of Investor No. 2. A total of $7 million was allegedly transferred in April of 2010, the same month that Starr purchased a luxury condo in Manhattan for $7.6 million, according to the SEC. The apartment has five bedrooms, a 32-foot granite lap pool, and a 1,500-square-foot garden. The New York Daily News reported that at the time of his arrest, Starr was found “cowering in a closet” at that E. 74th street residence.
“Starr breached his fiduciary duty as an investment advisor 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.”
Where he went astray
A person identified only as an insider told the New York Daily News that when “Starr started in the financial world, he was a nebbish accountant from the Bronx – bad haircut, terrible glasses. Everything about him was upbeat, and there was nothing he couldn't or wouldn't do. Even behind the bad clothes and terrible public persona, you could tell that there was a great salesman."
After Starr earned a tax law degree from New York University in 1972, he reinvented himself as a financial advisor, according to the insider.
"It all started to change when he began to do the taxes, and then began handling the money of famous old family estates, such as the Mellon family. He was introduced to, and became friendly with, some of the big names in the New York financial world, and he would never hesitate about dropping names,” the insider said.
The New York Daily News reported that Starr “formed an alliance with Democratic Party rainmaker Marvin Rosen.” That led to not just being an advisor for the rich, but to being politically connected as well.
Early in his rise from accountant to financial guru, he divorced his wife and married his secretary. After his second wife was diagnosed with multiple sclerosis, he met a former stripper named Diane Passage. After that, the insider told reporters, he “was never the same.” In recent months, he started “going haywire,” devoting his life to pleasing Passage… and that required a lot of money and impressive connections.
"For new clients, he always made a big thing of acting as though he was too big, too important or too busy to take your investment," the insider said. "But in the end, he'd take anything – half a million, a million."
What happens to the $700 million in assets that Starr controlled through his companies?
“No one is effectively making investment decisions,” said SEC attorney Todd Brody. Therefore, a federal judge appointed Aurora Cassirer, from the law firm of Troutman Sanders, to serve as interim monitor for Starr’s firms. This was considered necessary because the firms did not have enough manpower to handle the flood of requests for refunds once the charges were made public. U.S. District Judge Sidney H. Stein told reporters that a full receiver will soon be appointed. Meantime, Cassirer has authority to approve transactions over $1,000 and to offer an opinion on the viability of the firms.
Prosecutors estimate there could be as many as 200 victims of Starr’s schemes. Wesley Snipes, who was found guilty of misdemeanor tax charges and is now involved in an appeal, believes Starr’s arrest may help him.
"Considering Starr was the lead witness against Mr. Snipes and we now know he committed perjury during the trial, we think it is incumbent upon the government to dismiss all charges immediately," said Bob Barnes, Snipes's attorney.
Meanwhile, Starr denied all wrongdoing at a recent bail hearing. He was not represented by an attorney and remains in custody.