More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The Securities and Exchange Commission on Thursday, May 27, charged Manhattan-based financial advisor Kenneth Ira Starr with fraud and is seeking an emergency court order to freeze his assets after he stole $7 million in client money for his personal use, the SEC said in a news release.
The charges include Starr's alleged purchase last month through an entity called Colcave of a multimillion-dollar apartment where he and his wife, Diane Passage, now reside. The SEC's complaint named Starr, Passage, and Colcave as defendants to recover client assets now in their possession. In addition to the emergency relief, the SEC's complaint seeks payment of interest and financial penalties from the defendants.
"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, in the release. "Starr betrayed the trust of some clients who have looked to him for years for investment advice and financial guidance."
The SEC alleges that Starr and two companies he controls, Starr Investment Advisors and Starr & Co., violated securities laws pertaining to investment advisers and made unauthorized transfers of money in client accounts that ultimately wound up in Starr's personal accounts.
"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," the release said, adding that in this case, client assets were held in a safe in Starr & Co.'s offices "despite the fact that Starr and his firms were not qualified custodians."
Starr Investment Advisors failed 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, the SEC charges.
According to the complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without authorization. The transferred funds were used to buy a $7.6 million apartment on the Upper East Side in Manhattan on April 16. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without authorization. The other two investors have not been reimbursed, the SEC said.
The complaint also alleges that Starr transferred $1.7 million from the personal account of a client and the account of a charity in August 2009. When Starr attempted another $750,000 transfer from the same client in April 2010, the bank alerted the client, who then halted the transfer and demanded a reimbursement of all money.