Bail Denied for Manhattan Investment Guru to the Stars in Alleged Ponzi Scheme - NBC New York

Bail Denied for Manhattan Investment Guru to the Stars in Alleged Ponzi Scheme

Judge says, "The defendant is a serious risk of flight"



    Investor involved shelled out advice to Hollywood's A-listers. (Published Thursday, May 27, 2010)

    A judge denied bail last night for a Manhattan investment adviser to celebrities, politicians and business tycoons accused of perpetrating a $30 million fraud and Ponzi scheme

    Ken Starr, who boasts a client list that includes Annie Leibovitz, Uma Thurman, Martin Scorsese, Wesley Snipes, Henry Kissinger, Caroline Kennedy and Robert Ziff among others, was arrested by IRS agents Thursday morning on investment fraud, tax fraud and other related charges, officials said.

    Last night, Judge John Koeltl denied Starr's bail bid, saying, "The defendant is a serious risk of flight."

    Judge Koeltl did say he would consider a written bail request -- perhaps one that includes electronic monitoring and home confinement. Assistant U.S. Attorney Bill Harrington opposed bail, pointing out that agents found Starr hiding in a closet in his home as evidence that he may be willing to flee.

    Defense attorney Josh Klein said his client's initial reaction to hide was fear-based. Klein said Starr was "petrified" when agents came to his home and didn't know the men banging on the door were with the federal government. Harrington called that explanation "ludicrous."

    The prosecution accused Starr of lowballing his assets in answers he gave to pre-trial services. Harrington said Starr claimed he had $350 in cash, a $7.5 million apartment and a $1,000 vehicle. 

    "It's just not credible," said Harrington.

    Starr's lawyer claimed the financial adviser was merely answering questions posed to him and that he wasn't hiding anything. Klein said the amount of cash Starr described was in response to how much he had on him when he was arrested. The judge sided with the prosecution.

    "The circumstances of what happened today lend strong support to a tendency not to face potential charges," Judge Koeltl said last night. "It is not really realistic to think that the defendant was forthcoming with respect to his assets."

    Starr, 66, has served as the Chairman and Chief Executive Officer of  the New York-based Starr & Company since its founding in 1989. He has no relation to the Ken Starr who investigated President Bill Clinton in the Monica Lewinsky affair.

    Metropolitan Washington Airports Authority Police Department

    U.S. Attorney for the Southern District Phareet Bharara detailed the charged in a press conference Thursday afternoon, saying there are some 200 affected clients with the fraud totaling $30 million, but that number is expected to grow.

    Read the complaint.

    Meantime, the Securities and Exchange Commission filed emergency charges against Starr's company in order to freeze assets he allegedly stole from clients.  “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. 

    Also arrested Thursday morning was Andy Stein, the former Manhattan borough president and New York City Council President.  He was charged with lying to the IRS about assets he had moved and hidden from scrutiny. Bharara stressed that Stein has only been charged with lying to investigators.

    Stein was released on $250,000 bail Thursday afternoon, but Starr was ordered detained because the judge said his "instinct to run is telling."

    That's because when federal agents went to Starr's home earlier in the morning they found him hiding in an upstairs closet behind clothes, after his wife and son had told them he was not at home. He faces minimum of 25 years behind bars.

    Sources tell NBCNewYork that Stein owed more than $2 million in back taxes and that he was using money that Starr deposited in a Wind River LLC account that was linked to an American Express card.  "Approximately $1.6 million was deposited into the account and withdrawn to cover what appear to be Stein's personal expenses," sources said. Some of the withdrawals include $77,171 at ATM machines and $6, 034 at Duane Reade.

    Sources tell NBCNewYork that Stein denied to the IRS "his use of credit cards in the names of third parties and his rental of a luxury summer home in Bridgehampton."  Stein's attorney Andrew Maloney did not immediately return calls for comment. 

    A source familiar with the case said Starr was able to meet some of his clients through parties thrown by Denise Rich.  Rich, a singer, is a philanthropist who is divorced from one-time fugitive billionaire Marc Rich.

    In the complaint unsealed yesterday, Starr is accused of  "defrauding his clients by engaging in at least two types of schemes."

    First, the complaint reads, Starr solicited investments from his clients and then diverted the money to himself, his family and close associates. Second, where Starr exercised direct control over the personal bank accounts of his clients, he allegedly made unauthorized transfers to himself and close associates, the complaint reads.

    The IRS agent investigating the alleged fraud said the "conduct was characteristic of a Ponzi scheme."

    One of his clients, jeweler to the stars Jacob Arabov -- known as "Jacob the the Jeweler" -- lost millions under Starr.

    His lawyer, Benjamin Brafman issued a statement to NBCNewYork saying "Mr. and Mrs. Arabov unfortunately invested substantial personal assets through several prominent individuals they trusted. It is now clear that they were defrauded." 

    He said the Arabovs intend to "pursue all legal remedies."

    Federal officials say that using his client's money, Starr last month bought a new condominium for $7.5 million on the Upper East Side which featured five bedrooms, a 32 foot indoor pool, a 1,500 square foot garden on the main floor and a wall of floor to ceiling windows.  The bulk of that money, $4.2 million, came from a client identified as an "elderly heiress" who is nearly 100 years old.
    Another victim -- an actress described in the complaint as Client #2 -- discovered that Starr transferred $1 million from her account without her permission but returned it after she confronted him in April, -- but did so using another client's funds.

    Starr's Manhattan office couldn't be reached for comment. Stein's office has not yet been reached for comment.

    A source familiar with the case said one of Starr's alleged associates is Marvin Rosen, a one-time finance chairman for the Democratic National Committee.

    Rosen did not return calls to his office and through the DNC for comment and is not charged with any wrongdoing.

    Court papers describe "Associate #3" only as "a former national official of a major political party."

    The documents allege Starr improperly invested clients cash to his 'associates' projects. The court papers do not say if  "Associate #3" knew of Starr's alleged scheme.

    Starr's celebrity list of clients includes some who have occasionally stumbled into trouble. Starr testified in 2008 that he warned actor Wesley Snipes that he could get  into trouble if he didn't pay his taxes.

    Snipes was convicted in Florida of three counts of failing to file tax returns. He was cleared on fraud and conspiracy charges.

    Starr also took on  Annie Leibovitz as a client in 2007 and he allegedly introduced the celebrity photographer to Art Capital Group, where she took out a massive $24 million dollar loan. After defaulting on that loan, Leibovitz apparently tried to pin some of the blame on Starr, saying she didn't  fully understand the terms of the loan.

    In 2002, Sylvester Stallone sued Starr after his investment in Planet Hollywood didn't turn out as the Hollywood actor had anticipated.

    The government said it expects additional victims and additional funds to come to light as the case moves forward.