Kenneth Ira Starr, an investment adviser to celebrity clients that reportedly include Uma Thurman, Martin Scorsese, Annie Leibovitz, Goldie Hawn, Henry Kissinger and Caroline Kennedy, was arrested by federal authorities Thursday morning. Starr, 66, was charged by the U.S. Attorney's Office for the Southern District of New York with defrauding clients of some $30 million.

According to the complaint filed in the Southern District of New York, Starr and Andrew Stein, 65, a former president of the New York City Council, have been charged with five counts of fraud, including wire fraud, fraud by an investment advisor, money laundering, providing false statements to the Internal Revenue Service and providing false statements to a federal officer.

Separately, the Securities and Exchange Commission has also filed fraud charges against the Manhattan-based financial advisor. The SEC 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 $7.6 million dollar apartment in Manhattan where he and his wife now reside. According to court documents, approximately $5.75 million of the money Starr used to buy the new luxury condominium came from the personal or business accounts of a nearly 100-year-old heiress.

Celebrity Clients Entrusted Starr with Entire Financial Lives

Starr's firm, Starr & Company, which owns Starr Investment Advisers, purported to be in the business of managing the assets of, and providing financial planning advice to high net worth celebrity clients. According to the complaint, Starr's famous and powerful clients entrusted him with management and control of their financial affairs, from tax filing to investing services. In some cases, he assumed "total control over his client's financial affairs by collecting their earnings, investing their savings and paying their bills," the complaint says

"Today's charges against Kenneth Starr seem to confirm what has become all too apparent lately---anyone can be a victim of financial fraud," said Preet Bharara, U.S. Attorney for the Southern District of New York, at a press conference this afternoon. "Whether you are an ordinary citizen or a savvy businessman or a sophisticated celebrity, you can be victimized."

The SEC alleges that Starr and two entities he controls - Starr Investment Advisors LLC and Starr & Company LLC - 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.

Starr allegedly defrauded many of his clients by diverting funds to himself, to his close associates or to risky investments in which he, his wife, his son, a former national official of a major political party and a partner at a prominent national law firm, among others, held undisclosed financial interests. In some cases where Starr exercised direct control over personal bank accounts of his clients, Starr made unauthorized transfers of funds to himself or to his closest associates.

Possible Ponzi Scheme

According to a sworn affidavit by Robert Beranger, special agent for the Internal Revenue Service, when clients demanded payments that Starr could not meet, he transferred funds from one client to another. "I believe Starr's fraudulent conduct was characteristic of a Ponzi scheme," said Beranger.

"Starr breached his fiduciary duty as an investment adviser in the most egregious manner possible - he stole the funds his clients entrusted to him," says 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."

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. 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.

Starr is also being accused of defrauding a jeweler and his wife of nearly $14 million. According to the federal complaint, he promised to invest the funds "in sure deals." Instead, the court documents claim, Starr loaned or diverted the funds to himself and his close associates.

"No matter how smart you think you are, you should always carefully check on your investments and even more carefully vet your financial advisors," says Bharara of the U.S. Attorney's Office. "Trust, but verify. If a deal sounds too good to be true, it probably is, and if someone is pretending to have the Midas touch, he's probably just selling you fool's gold."

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