What the ADV form of Kenneth I. Starr's RIA reveals and what to make of it

Ronald M. Starr, who according to published reports is Kenneth Starr’s son, is listed as chief compliance office of Starr Investment Advisors, according to an ADV dated May 25. Those published reports also state their ages as 41 and 66 respectively.

That family connection within a firm that regulators and prosecutors allege perpetrated $30 million worth of fraud on high-net-worth clients raises the question of whether close family members ought to serve as chief compliance officers in an advisory firm.

“Any relationship of this kind raises questions as to whether the CCO can act independently and do his job effectively. If the CCO uncovers improper conduct, he or she might not take decisive action for fear of hurting a family member,” wrote Les Abromovitz, a senior consultant with National Compliance Services, in an e-mail to RIABiz. He was speaking generally, not about the Starr situation in particular.

The SEC has no specific rules about a family member serving as chief compliance office, said a spokesman, though he added that the agency does pay special attention to conflicts of interest.

There is no consensus in the investment advisory world on how significant it is that the CCO is related to a firm’s owner.

“In fact, there are advisory firms that use related persons in the CCO role that have terrific compliance programs. I can’t see how prohibiting an owner’s brother from being the CCO will ensure that such frauds will never occur. Further, doing so would create unnecessary roadblocks for some firms in designing an appropriate and effective compliance program,” said David Tittsworth, executive director of the Investment Adviser Association, who added that the rule allows the CEO to be the CCO.

“Obviously, the rule does not contemplate that the CCO will collude with other principals of the advisory firm to defraud their clients. The SEC has rules that prohibit fraudulent acts by an investment adviser, but no one has figured out how any such rules or laws will prevent fraud in every instance. Perhaps in this case (as in Madoff and other cases), how the adviser controlled custody of client assets may have been a major factor in the fraud and focusing on such activities might be the most productive avenue to preventing similar frauds in the future.”

High-profile executives

It’s not clear what the younger Mr. Starr’s qualifications for the position were. He is also a member of the board of directors of GlobalOptions Group, according to that company’s March 16 annual report. Manhattan-based GlobalOptions is a publicly held risk mitigation firm that had $102.1 million in revenue for the year ending Dec. 31, 2009. The company has some high-profile executives, including Harvey Schiller, who is chairman and CEO. Until April, former New York City police commissioner Howard Safir was an executive.

GlobalOptions did not respond to calls or an e-mail for comment.

According to the bio included in the annual report, Ronald M. Starr, has been a director since June 2005.

“Since 1996, Mr. Starr has been a Managing Director at Starr & Co., LLC, an accounting and business management firm for high net worth individuals,” according to the annual report, which also lists Millennium Technology Ventures and PS Capital Ventures as firms he had been involved in. He also worked at Proskauer Rose LLP, a New York City law firm.

“The Board believes that, as an attorney, and as an executive in the venture capital industry, Mr. Starr has broad experience advising and assisting in the growth of small and mid-size companies,”the report says.

Not charged with wrongdoing

The younger Mr. Starr has not been charged with wrongdoing. But he is referred to as Kenneth Starr’s son in the U.S. Attorney’s complaint as it relates events surrounding one of the alleged frauds:

Nearly $14 Million In Other Investment Fraud

Over the course of 2008 and 2009, STARR is also alleged to have defrauded a jeweler and his wife of nearly $14 million. As set forth in the Complaint, STARR promised to invest the jeweler’s money in sure deals. In fact, STARR did not invest the monies as promised, but either: (1) loaned or diverted the money to himself and his close associates, including ANDREW STEIN; or (2) invested the money in projects in which his wife, his son, or his close associates (including ANDREW STEIN) had an undisclosed financial interest -– projects that were, on the whole, riskier than the “sure deals” STARR had promised.

As set forth in the Complaint, when the jeweler’s wife became concerned that she was not receiving any return on the investments made by her and her husband, STARR repeatedly promised her that she would soon receive large payments. Those large payments never materialized, however, and STARR made a series of shifting and far-fetched explanations as to why the jeweler’s wife had not received any money. Unbeknownst to STARR, the jeweler’s wife recorded many of the conversations she had with STARR.

The elder Starr is facing criminal charges as well as an SEC lawsuit. Two entities, Starr Investment Advisors LLC and Starr & Co. LLC, are also named in the cases. Ronald M. Starr is not listed as his son in the ADV, but various news reports and court documents have called him that.

The family connections within Starr Investment Advisors have not yet been highlighted in the ongoing waves of coverage about the alleged fraud.

Parallels to previous cases

However, in statements at a press conference, the U.S. attorney noted that the parallels to previous cases, though he left Bernie Madoff’s name unsaid.

Manhattan U.S. Attorney Preet Bharara said at a news conference. “Starr had an M.O. that has become unfortunately familiar in recent times. He uses access to famous and powerful clients to burnish an image of trustworthiness inducing them to trust him … much of it was a mirage.”
Yet another similarity is the involvement of family. Bernie Madoff’s two sons were executives in the company.

The SEC has extremely high expectations for people serving as chief compliance officers, Abromovitz noted, pointing to the SEC rules:

Rule 206(4)-7 requires each adviser registered with the Commission to designate a chief compliance officer to administer its compliance policies and procedures. An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm. Thus, the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.

Examiner’s skepticism

“Even if the family member is immensely qualified … the nature of the relationship creates an appearance of impropriety,” he said, and warned that finding a relative as a COO might increase an examiner’s skepticism about a firm.