Celebrity Adviser Starr Used Name-Dropping in His Alleged Fraud
Originally published on Bloomberg.com on June 22, 2010
By: John Helyar and David Glovin
Kenneth I. Starr knew how to cultivate relationships with powerful people, and he did it in the most transparent way — by serial name-dropping.
Dining with Starr in the Grill Room at the Four Seasons in New York meant listening to him reel off bold-face names as fast as he guzzled Diet Cokes, according to one occasional lunch companion who asked not to be identified.
Certain people would come up again and again in his boasts, according to a story in the June 21 issue of Bloomberg Businessweek. Starr would say he had lunch with Peter Peterson, co-founder of the private-equity firm Blackstone Group LP, or that he and “Pete” were talking at the Council on Foreign Relations, long chaired by Peterson, or that he had done something with “Pete,” according to the companion.
Starr managed money for a living, and his relationship with Peterson was one of his key assets. Rachel “Bunny” Mellon, the 99-year-old widow of the bank heir and philanthropist Paul Mellon was a longstanding client, according to Alex Forger, Mellon’s lawyer. It was his connection to the Mellons that started Starr on his path to wooing the rich, according to people who knew Starr and who asked not to be identified.
Starr’s career famously came to an end last month when government agents arrived at his home on Manhattan’s Upper East Side and found him hiding in a closet, prosecutors in Manhattan said on the night of his arrest. His $7.5 million condominium, which he shared with his fourth wife, Diane Passage, a pole dancer, featured floor-to-ceiling windows, a granite lap pool, and a 1,500-square-foot garden, financed with what prosecutors said was plundered cash, according to a criminal complaint.
Days after his arrest, a grand jury indicted Starr for cheating 11 clients — Jim Wiatt, the former head of the William Morris Agency, and actress Uma Thurman among them — out of $59 million.
Starr pocketed half that amount, while the other half was placed in investments in which he or his friends had a secret interest, prosecutors said. Starr has denied wrongdoing and is being held at the Metropolitan Correctional Center in lower Manhattan. The Securities and Exchange Commission brought its own civil fraud lawsuit against Starr and Passage, seeking the return of tens of millions of dollars.
The two haven’t yet responded to the SEC suit. A judge last week extended the freeze on the couple’s assets at a hearing attended by Passage, who looked uncharacteristically demure in a pink cardigan and a black skirt. She declined all reporters’ questions except for one from Bloomberg Businessweek, about her age.
“Thirty-four,” she said. “You can take a couple of years off that if you want to.”
The disintegration of Starr & Co., which once managed more than $700 million for about 175 wealthy individuals, exposes an uncomfortable truth about the elite crowd he preyed on — that wealthy, sophisticated people could be such easy marks for fraud. While the numbers involved aren’t on the scale of Bernie Madoff’s Ponzi scheme, Starr shared Madoff’s ability to create an aura of exclusivity around himself that appealed to the elite.
His allure was augmented by Starr’s attendance at invitation-only business gatherings, such as Allen & Co. President Herbert Allen’s annual media conference in Sun Valley, Idaho.
Still, there is no special trick to Starr’s alleged con game that one can glean from his indictment or the SEC complaint. So how is it so many people so willingly allowed their pockets to be picked?
“Everyone follows the herd,” said Ken Springer, a former Federal Bureau of Investigation agent and founder of New York- based investigative firm Corporate Resolutions. “Everyone says this guy is the best, and no one vets the people.”
Starr & Co. rose by buzz and fell by buzz. A court- appointed receiver has reported that only 30 to 40 clients remained with the firm, after scores of others left amid repeated incidents of unauthorized client wire transfers and money-losing investments.
Individuals once affiliated with Starr have typically gone mum — Peterson declined to comment on either his relationship with Starr or the accusations against him — or distanced themselves from him. Millennium Technology Ventures, a venture- capital firm that grew out of one co-founded by Starr and Peterson, addressed the issue in a June 4 letter to investors.
“He has not been involved in investment decisions for the fund and has not been actively involved in any operational or strategic decision-making capacity with the fund for many years now,” wrote Daniel Burstein, one of Millennium’s two managing partners who were once with Blackstone. In addition, he wrote, “Mr. Starr has been removed from his role as a member of the Special Advisory Board.”
Peterson remains a special advisory partner with Millennium, according to the firm’s website. Burstein declined to comment for this story.
Starr’s connections to Blackstone go back to the early 1990s, when the firm was considerably smaller than it is now. Blackstone received $90 million from clients of Starr & Co., according to a lawsuit filed in 2009 by the estate of former Starr client Joan Stanton.
Actor Wesley Snipes, for instance, put $1 million into Blackstone, according to testimony in the actor’s 2008 tax- evasion trial. Injecting himself as a middleman, Starr charged clients for placing their money with the firm and pooled their investments in partnerships he controlled, prosecutors said. The Stanton complaint doesn’t claim that Blackstone was aware of Starr’s motives.
The Stanton estate’s suit decried “excessive fees,” which came on top of Starr’s regular ones. His annual charges rose from $120,000 in the years after he began working with Stanton in 1987 to $228,000 in 2004. The suit also accused Starr of using the partnerships to prevent Stanton from having direct communication with Blackstone.
Stanton committed $5.1 million to a fund called Blackstone Domestic Capital Partners II, a Blackstone entity, her estate alleged. Her money didn’t go straight to Blackstone Domestic, according to the lawsuit. Stanton’s money was instead put with that of other Starr clients in a $12.4 million pool he formed called Blackstone Investors Partnership, which wasn’t affiliated with the Peterson Blackstone, according to the complaint.
Stanton’s Blackstone Domestic returns were supposed to go to a trust whose assets would be distributed tax-free to heirs. Those Blackstone returns went to purposes unknown, according to the Stanton estate’s complaint.
By 1997, Starr and Peterson had grown close enough to create and co-invest in a tech venture firm called P.S. Capital, according to filings and a person familiar with the enterprise. The vehicle’s chief financial officer and general counsel was Ronald Starr, a son from Ken Starr’s first marriage, and it created two investment funds totaling $13 million, according to this person.
As Internet fever spiked around the year 2000, P.S. Capital morphed into the more ambitious Millennium Technology Venture Fund, which, according to press releases, raised $160 million of investor capital, yielded more than two dozen technology startups, and included “special limited advisory partners” Peterson and Starr.
Dan Burstein, who previously had been a senior adviser to Blackstone and chief investment officer of P.S. Capital, became a managing partner of Millennium, as did Richard Kimball, then Peterson’s son-in-law.
The firm’s location in the same office building as Starr & Co. enabled Starr to be active in the firm. He was “actively involved in managing personnel matters,” according to a former Millennium secretary named Mystery Masiello, who filed a discrimination lawsuit against the company in 2003. She alleged that when she told the firm’s leaders she was pregnant in July 2001, Starr said, “Oh great, now Dan is going to have to get a new assistant,” referring to Burstein. The case was settled on undisclosed terms in 2003.
The Millennium fund, launched just before the Internet bubble burst, proved to be a dud. Its few successes — such as the Internet security company Phobos, which was sold to SonicWALL in 2000 — were overshadowed by big losses. About half of the original $160 million has been returned to investors, according to a person familiar with its finances who asked not to be identified. Millennium is in the process of being wound down, according to the June 4 letter to investors.
“They were caught up in the Oklahoma land rush” along with many other Internet investors, says Neil Livingstone, former chief executive officer of GlobalOptions Group Inc., a security company. GlobalOptions, which he said was the Millennium Fund’s only non-tech investment and its top- performing portfolio company after the bubble burst, went public in 2005. It owed much of its success to business it received directly from Millennium during the post-bubble malaise.
“We shut down a lot of their Silicon Valley companies,” said Livingstone, who is now CEO of Washington security firm ExecutiveAction. The firm was an early example of Starr’s growing propensity to invest client funds “in questionable and suspicious investments, often with a direct benefit to himself, his wife,” or friends, prosecutors said last month in Starr’s criminal complaint.
Starr also put his clients’ money straight into GlobalOptions stock. In a February 2008 SEC filing by GlobalOptions, Thurman and playwright Neil Simon together were listed as owning almost as many shares as the company’s CEO, Harvey Schiller.
In 2004, Millennium was reinvented by Burstein as Millennium Technology Value Partners, a provider of liquidity for distressed tech companies in exchange for equity stakes. In its new incarnation it has had some success, investing in companies that were later bought by Amazon.com Inc., Microsoft Corp. and AT&T Inc., and in April it closed a new $280 million fund to new investors, according to Millennium’s press releases.
Starr was listed on the Millennium website as a “special limited advisory partner” until February 2008. He effectively ceased involvement when Burstein changed the concept, according to people familiar with the firm.
Starr met Bunny Mellon when he was a young certified public accountant with Manhattan-based Oppenheim, Appel, Dixon & Co. The Bronx-born graduate of Queens College and Brooklyn Law School loved the idea of handling taxes for one of America’s richest families, according to a person familiar with the situation.
He absorbed his clients’ methods and desires, though he dressed inexpensively himself. He was following the advice of Paul Mellon, according to Livingstone, who recalls Starr invoking this line from the philanthropist: “If you have a bigger yacht than your clients, they won’t trust you.” The Mellons led Starr to another big-fish Oppenheim client, Arthur Stanton, who made his fortune as the first U.S. distributor of Volkswagen Beetles.
Stanton and his wife, Joan, lived at one of Manhattan’s finest addresses, 10 Gracie Square, according to a published report of her apartment’s sale in February. The Stantons’ apartment served as a salon to many of the city’s elite. Joan Stanton was an actress who had played Lois Lane in The Adventures of Superman radio show, and their home was often filled with performing artists, according to a person familiar with the matter.
When their daughter turned 21, Leonard Bernstein led the singing of Happy Birthday, the daughter, Jane Stanton Hitchcock, once recounted in an interview. Arthur Stanton introduced Starr to his social circle and endorsed his accounting. Film director Mike Nichols and stage director Hal Prince became Starr clients. Arthur Stanton died in 1987, leaving $60 million to his widow, and Starr pitched himself to manage it for her, according to a person familiar with the matter.
The lawsuit brought against Starr by Joan Stanton’s estate 22 years later, soon after her own passing at age 94 in May 2009, portrayed him as a predator who defrauded her of “tens of millions of dollars.” “Mrs. Stanton’s lack of financial acumen was known to Mr. Starr,” according to the complaint. “Mr. Starr began to cultivate Mrs. Stanton as a client who would come to rely on his services exclusively.”
Starr left Oppenheim in 1987 to start his own firm, he said in testimony at the 2008 tax-evasion trial of client Wesley Snipes. Skills honed on the Mellons and Stantons served him well in building a larger clientele, according to a person who has known him professionally for years. The person describes Starr as a master of ingratiating himself with people. He wasn’t suave; he wasn’t a Madoff in appearance and charm; he was rather abrupt.
So what was the appeal? This person describes Starr as very bright and says he came across as sincere. He could sit down with a piece of paper and map out detailed investments.
Starr’s reputation took its first public beating in 2002 when his client Sylvester Stallone sued him for keeping him invested in Planet Hollywood from 1997 to 2001, as the restaurant chain spiraled toward bankruptcy and the value of his 4 million shares withered. The actor accused Starr of putting his friendship with Keith Barish, a founder of Planet Hollywood, ahead of his fiduciary duty to clients, and sought at least $10 million in damages.
The litigation, settled on undisclosed terms in 2003, was an example of what prosecutors later said was Starr’s habit of making decisions without his clients’ approval. In 2006, Starr formed Starr Investment Advisors; regulatory filings indicate he had 26 to 100 clients and 11 to 50 employees.
Starr placed $6.5 million of Bunny Mellon’s fortune into two investment funds from 2005 to 2007 without informing his longtime client that they were “highly speculative and risky,” according to prosecutors. He also failed to “disclose certain conflicts of interest,” according to indictment against Starr. Barish didn’t return a call seeking comment.
Only in August 2009, when investigators asked Mellon’s attorney about these illiquid investments, did her representative become aware of the funds. Starr returned $4.3 million to Mellon that month, according to the indictment.
Starr’s behavior outside the office also turned erratic after taking up with Passage in 2005. He began to forsake his own counsel about modest appearances, spending more than $400,000 on jewelry from Jacob & Co., aka Jacob the Jeweler, during the span of several months in 2006, according to the criminal complaint.
In May 2007, he divorced Marisa Starr. He did so by filing court documents without her knowledge that claimed she agreed to end 16 years of marriage, according to her 2009 lawsuit. Starr’s fourth wife was a flashy, jarring presence in Manhattan society — tattooed, provocatively dressed and a pole dancer. She put on a Poledance Superstar competition in New York in October 2009 to raise money for a charity she started called S.P.I.N. (Single Parents In Need), according to a website promoting the event.
Starr was proud of her, too, showing iPhone pictures of her gyrating on a pole to fellow attendees at a Tribeca Film Festival function in 2008, according to people who were there.
In early 2008, Starr recruited Jacob the Jeweler, whose real name is Jacob Arabo, as an investment client. His money was invested in “sure deals” that included Glassnote Entertainment Group, which gave Passage a $150,000-a-year job, and Martin Bregman Productions, a movie venture involving Marty Bregman, a Starr client and a veteran producer of films such as Scarface, according to the criminal complaint.
Prosecutors said Passage wanted to make the film version of “The Desert Rose,” Larry McMurtry’s novel about an aging Las Vegas showgirl. The two doomed ventures represented $2.7 million of the $13 million of which Arabo was defrauded by Starr, according to the complaint.
The same network that made Starr rich quickly undid him, as stories of losses and strange behavior spread. Clients left the firm, including Mike Nichols and his broadcaster wife, Diane Sawyer, according to a person familiar with the matter.
Four months after Stanton’s death, her estate sued Starr for “gross abuse of trust and confidence” over 20 years. The Stanton complaint, combined with some individual complaints, spurred the Manhattan District Attorney’s office and the SEC to start asking questions.
Starr settled with the Stanton estate for an undisclosed sum in January, according to a person familiar with the situation. He also reached a $4 million settlement that month with an unidentified playwright and screenwriter who complained of being fraudulently induced to invest in a failed restaurant chain, according to the indictment.
Starr raided other clients’ accounts to make the payment, prosecutors said. In another winter development, a veteran account manager for Starr named Arnold Herrmann left for rival firm Citrin Cooperman & Co. and took some of his top clients, according to a Feb. 11 Citrin Cooperman press release. One of the clients was Barbara Walters, according to a person familiar with the matter.
As his firm disintegrated, Starr tried to maintain appearances. In February he borrowed $2.6 million from Los- Angeles-based City National Bank, according to a lawsuit filed by the bank on June 16, two weeks after Starr missed a $9,385 interest payment. At a March 10 meeting with federal investigators, he said his firm had 200 clients. While that would have almost been true at its peak, the list had dwindled to less than a quarter of that by the time of his arrest, according to the criminal complaints and a document filed in court by the Starr & Co. receiver, Aurora Cassirer.
In April, prosecutors said, Starr bought the $7.5 million condominium. This proved to be the final straw. On May 25, the lawyer for Bunny Mellon, Starr’s first big client and one of his last, was looking through her financial statements. He saw a series of mid-April wire-transfers out of her Starr & Co. account, totaling $5.75 million, according to prosecutors. Starr had allegedly raided the account to close on his condominium. The lawyer called the authorities. Two days later, federal agents were removing him from the closet.
The civil case is SEC v. Starr, 1:10-cv-04270, and the criminal case is U.S. v. Starr, 1:10-mj-01135, U.S. District Court, Southern District of New York (Manhattan).