From the August 2010 issue of Investment Advisor • Subscribe!

August 1, 2010

The Affluentialist: The Case of the Wealthy Celebrities and the Missing Funds

A high-end advisor offered family-office services and friendship for many years--then went rogue

Back in April, actress Uma Thurman played the heroine in a thriller where a devious financial advisor misappropriated $60 million from clients. In this case, however, the drama was real life and tthe money was hers. The story, which involves many more famous and wealthy clients, is particularly harmful to honest advisors of the affluent since it could raise unwarranted suspicions, especially after the Madoff affair last year. In this case, Thurman knew her advisor well, and many of his other clients considered him a friend.

Where Did the Money Go?

Thurman had a friendly relationship with New York advisor Kenneth Starr, who she relied on for many years for family-office service. Recently, Starr sent her monthly account statements only sporadically. She found them confusing, and wasn't sure what the advisor was doing on her behalf. Last year, Thurman showed the statements to a friend with a financial background who compared data for a three-month period and found her assets had dropped significantly. During this time, no one from Starr's office had contacted her. Thurman authorized her friend to instruct Starr to move all of the assets he managed for her into safer investments.

Their concerns didn't stop, however. Near the beginning of this year, Thurman stopped receiving statements altogether. On April 17, Starr unexpectedly left a series of voice mails stating that he wanted to "check in," but not specifying any issues. Thurman ignored the calls, since her friend was dealing with the advisor. Then, six days later, her bank called. The representative wanted to find out if she knew why $1 million had been wired from her account to a lawyer associated with Starr on April 13--a few days before the advisor left messages for her. The lawyer was Jonathan Bristol of the prestigious Winston & Strawn firm, one of the top 50 law firms in the country with clients that include Sears, Allstate, American Airlines, Bell Atlantic, Monsanto, Abbott Laboratories, Hyundai, and Black & Decker.

She's had enough. Neither Thurman nor her friend knew anything about the transaction. On April 26, Thurman and her lawyers marched into Starr's office. They asked him why the $1 million had been wired to Bristol. He replied that it was for an investment, but the opportunity to invest was missed. He didn't provide any other details. They then asked him to contact Bristol so the funds could be returned. Starr left the room and returned several times claiming Bristol was unreachable by either phone or email. At one point, Starr sent in an employee who told Thurman and her lawyers that the $1 million purchased a two-week certificate of deposit.

Tapping Client Accounts

Without Starr's knowledge, Thurman and her lawyers used a Blackberry to go online and search for Bristol and found a number for his law firm. Thurman then used one of Starr's private conference rooms, called Bristol, and told him that she had a problem since a large portion of her savings was in his account. Bristol replied that he didn't know that the money was hers and that he thought it belonged to Starr. He got angry at the advisor's bungling. Bristol promised to send the money back--and also promised not to tell Starr about their conversation. Thurman and Bristol spoke several more times that day, as he updated her on the progress of returning the $1 million, which she eventually received.

However, Thurman's money had left Bristol's account prior to her calling him, so the attorney needed another way to pay her. As it turned out, $1 million was transferred from the lawyer's account to Thurman's on that day--the problem was its true source. Just prior to Bristol making the transfer, his account received a $1 million deposit from the account of another client of the financial advisor, Jim Wiatt, former CEO of the William Morris talent agency, and his wife.

These unauthorized transfers were just a fraction of Starr's schemes. The days leading up to April 16, and the day itself, turned out to be central to one of key charges against Starr. On April 16, Colcave, LLC purchased a luxury condo apartment on the Upper East Side of Manhattan for $7.5 million. The online advertisement described ...

... what that sum would purchase: five bedrooms, 6.5 baths, 32 ft. indoor lap poll, recreation room, media room, terrace garden, kitchens with commercial-quality appliances and floor-to-ceiling windows, among other high-end amenities. Starr signed on behalf of Colcave, and even sent out home change-of-address notices to some clients. The advisor paid cash for his new home. The source of the purchase was the personal savings of the advisor's clients.

On April 13, that $1 million transferred out of Thurman's account went to Bristol's and was used in the purchase of the condo, according to complaints against Starr. By the time the concerned representative from her bank called to ask about the transfer, Starr had purchased the condo, and her money was gone from Bristol's account.

Thurman wasn't the only victim or the one who lost the most on this transaction. Completely unknown to 99-year-old Rachel "Bunny" Mellon, an heir to the Warner-Lambert fortune and widow of philanthropist Paul Mellon, her money also helped to purchase the advisor's new home, contributing $5.75 million of the $7.5 million acquisition price. Again, at the crossroads of the deal was attorney Bristol and his busy bank account. A well-known attorney in the area, Bristol even served on New Jersey Supreme Court's Office of Attorney Ethics.

Surprise Loans

The person who lost the most with Starr was someone who was already in a personal crisis for another reason. Jacob Arabo, better known as Jacob the Jeweler, sold gaudy bling to Starr (before he became a client), NBA players, Elton John, Kanye West, Rudy Gulianni, and major hip-hop artists, such as Jay-Z. In fact, over 65 songs refer to him, and he's featured in a video game. He was thought of as a hip-hop Harry Winston.

Interestingly, Arabo didn't become a client of Starr's when they first met a charity event; that came two years later. Starr told the jeweler that he handled many investments, but he only allowed close friends to invest in them. Although Arabo had invited Starr to his wedding, the advisor indicated that he wasn't quite ready to allow him to take part in his recommended projects in which he and his friends participated. Several months later, however, Adabo and his wife arrived at Starr's office to discuss investments, since the advisor felt he could now bring them into the group. Starr told them how excited he was about his current projects: a company that manufactured voting machines for third world countries, another that focused on the Chinese Internet, and Martini Park, a lounge business. Starr's son sometimes attended the follow-up meetings and demonstrated his excitement about the investment potential of the projects. Starr claimed the couple could make five to ten times their original investment.

A Friend's Promise

Adabo decided that, given his personal circumstances and Starr's assurance of the safety of the investments, he should proceed. The jeweler was about to start a 30 month prison sentence for money laundering in connection with a narcotics case, so his wife gave the advisor a total of $14 million between February and October 2008 to invest while he was away. Starr told him that he would see big results in 2009 for his wife while the merchant was in jail.

At the advisor's suggestions, Adabo's wife would have authority over the investments while he was in jail and all of their investments would be handled through an LLC, since other investors would be sensitive to being associated with someone with a criminal conviction. The couple signed many documents, which they didn't read or have a lawyer review since as they told investigators they believed Starr a friend and lawyer that was looking out for their interests. They stated that they didn't recall any conversation about fees that had taken place by that point.

However, when it subsequently came to withdrawing funds or getting information, the couple's confidence sank. When working on the couple's tax returns, Adabo's accountant told his wife that she should get K-1s for the investments with Starr. She also needed to withdraw money to pay taxes. She asked many times for both, but Starr continually rebuffed her, and even sent her to attorney Bristol who said he didn't know what she was talking about. Further attempts to withdraw funds resulted in bizarre excuses by Starr and stories about needing to confer with government officials, including a minister of Venezuela who would be handing over or approving checks. Starr did insist, though, that she sign papers indicating that the firm would receive an 11% commission for its work.

At this point, it appears that Adabo and his wife lost the entire $14 million invested with Starr.

Starr's end wasn't quite as glamorous as the life he tried to lead. When FBI agents arrived at his apartment to arrest him they found him cowering among the clothes in his closet.

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