Enforcement: USA's SEC charges financial adviser with fraudulent use of clients' money

The SEC alleges that Starr and two entities he controls — Starr Investment Advisors (sic) LLC and Starr & Company LLC — have made unauthorised transfers of money in client accounts that ultimately wound up in Starr’s personal accounts. They breached 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 companies 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 USD7 million from the accounts of three clients between 13 April and 16 April, 2010, without any authority to do so. The transferred funds were ultimately used to purchase a USD7.6 million apartment on the Upper East Side in Manhattan on 16 April. When one of the clients detected the unauthorised transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without permission. The other two investors have not been reimbursed.

The SEC’s complaint alleges that the unauthorised transfers in April 2010 were not the only instances when Starr misappropriated client funds. In August 2009, Starr and his entities began transferring approximately USD1.7 million from the personal account of a client and from the account of a charity run by that client. These were all unauthorised transfers. In April 2010, an additional transfer of USD750,000 was attempted from an account belonging to that client. But 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 unauthorised USD1.7 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 breaches of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and, further, charges Starr Investment Advisors with breaches 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 breaches of the charged provisions of the federal securities laws, surrender of the defendants’ and relief defendants’ ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants.