Guzzo the Contrarian

On May 27, 2010, the United States Attorney General’s Office announced the arrest of Kenneth [I.] Starr (pdf), a financial adviser to the stars, allegedly for conducting a purported Ponzi scheme with his clients’ money. According to an excerpt from a New York Times article about Kenneth Starr’s arrest -

“But when they arrested him on Thursday, federal prosecutors described him as something else: a mini- Madoff who diverted $30 million of his clients’ money to buy himself a sprawling Upper East Side condo complete with an indoor swimming pool and a 1,500-square-foot garden.”

Unfortunately, just like the Madoff ponzi scheme, many Hollywood stars invested their savings with Starr. Reportedly, some of those stars include Sylvester Stallone, Annie Leibovitz, Wesley Snipes, Al Pacino, Martin Scorsese, Ron Howard, and other Hollywood celebrities and big-wigs.

But, I’m not writing this post in order to report the same news second hand. I’m writing because of something the U.S. Attorney, Preet Bharara, said during his news release. According to him -

“Today’s charges against Kenneth Starr seem to confirm what has become all too apparent lately — anyone can be a victim of financial fraud. Whether you are an ordinary citizen or a savvy businessman or a sophisticated celebrity, you can be victimized. The vast majority of financial advisors are honest and honorable. But even one bad apple can destroy the life savings of hundreds of unsuspecting people. No matter how smart you think you are, you should always carefully check on your investments and even more carefully vet your financial advisors. Trust, but verify. If a deal sounds too good to be true, it probably is, and if someone is pretending to have the Midas touch, he’s probably just selling you fool’s gold.” (my emphasis)

According to Mr. Bharara’s statement, “No matter how smart you think you are, you should always carefully check on your investments and even more carefully vet your financial advisors. TRUST, BUT VERIFY.”

So, you know what? That’s exactly what I did.

I attempted to verify Kenneth I. Starr’s history by using all of the the online investigative resources (that I know of) that our financial regulators provide individual investors, in order to help us prevent from being deceived by unscrupulous investment advisers and brokers.

I know that the regulators, whose jobs are to enforce the rules and laws, wouldn’t shift the burden of responsibility upon us without providing us all of the tools we need to verify those managing our money. Individual investors must be privy to all of the same information at Mr. Bharara’s disposal, otherwise he wouldn’t have said to verify before we trust, right?

Now bear with me. I’m not a lawyer, a financial expert, nor a computer expert, and I’m not sure if I completely understand all of the information that I find from our regulatory enforcement resources. But, I’ll post what I find, and if I miss something or if I’m interpreting something incorrectly, please feel free to point out my mistakes in the comment section of this post.

I also don’t know Kenneth Starr and have never heard of him before reading about his alleged exploits in the news. But, since a similar news report states that he’s been sued by Sylvester Stallone in 2002 and Joan A. Stanton in 2008, I’m thinking that there must be some data to be found verifying this.

I started my search with FINRA Broker Check. As they describe themselves, FINRA, the Financial Industry Regulatory Authority, was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. According to their site -

BrokerCheck is a free tool to help investors research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers. It should be the first resource investors turn to when choosing whether to do business or continue to do business with a particular broker or brokerage firm.

FINRA did have a detailed report on Kenneth I. Starr, CRD# 5141814, but the search results aren’t linkable. You’ll have to check it out yourself. It disclosed that he had one SEC investigation dated 07/23/2009 and one SEC civil action dated 05/27/10. Although his employment history dates back to 01/1980, I didn’t find any other customer disputes, disciplinary actions, or regulatory events prior to this most recent event.

I next visited the SEC Investment Adviser Public Disclosure (IAPD) website. A search revealed that the SEC also had a detailed report on Kenneth Starr, through his company Starr Investment Advisors, LLC, CRD# 140234. Again, the search results aren’t linkable, so you’ll have to check it out yourself.

I searched through all of the pages of this SEC report and didn’t find anything to suggest that Mr. Starr couldn’t be trusted, or previously did anything wrong. His Form ADV listed no criminal actions, no regulatory actions, or any civil judgments against him. According to this SEC disclosure report, it seems as though he has a spotless record. However, the report shows that Starr Investment Advisors, LLC does conduct business in CA, NY, And TX.

So, I visited the North American Securities Administrators Association (NASAA) Fraud Center to find the links to each of those three State’s securities regulators. I first visited the California Securities Regulation Division to search for more information.

Surely, the great State of California would have some information alerting us that perhaps Mr. Starr has been less than ethical in the past, right?

Nope. The CA Securities Regulation Division refers online investment adviser inquiries back to the SEC IAPD website, and online broker inquiries back to the FINRA Broker Check website. California does not provide a freely searchable online database of investment advisers or brokers registered in their State.

So, let’s see what New York State has to reveal.

NASAA referred me to the Office of the New York Attorney General, Investor Protection Bureau. Although the NY Investor Protection Bureau provide a couple of handy brochures, most of the steps they suggest taking beforehand rely upon trusting what the adviser or broker tells you. If you are seeking an adviser’s or broker’s history, they basically refer investors back to the IAPD and FINRA sites, where you can access their IARD or CRD. They also do not provide a freely searchable online database of investment advisers or brokers registered in their State.

Well, let’s see if the Texas State Securities Board can provide more information about Kenneth I. Starr.

Personally, I found the Texas State Securities Board website laid-out well and very easy to use. An online search using the Notice Filed Investment Advisers database did reveal that Starr Investment Advisors, LLC was registered in the State of Texas, but it didn’t reveal any other information about the LLC or Kenneth I. Starr. Again, just like CA and NY, TX refers online investment adviser or broker history inquiries to the SEC and FINRA.

So, all of my attempts to “verify” any negative information about Kenneth I. Starr, online, from both Federal and State securities regulators proved fruitless. Using the resources our regulators provide us didn’t allow me to “verify” whether or not Mr. Starr is trustworthy.

I did not attempt to call any of these regulators or pay a fee to request written documentation. Since the CRD or IAPD databases provided by the SEC and FINRA should contain all the information an investor would need to determine if Mr. Starr was trustworthy or not, I would think that a telephone call or written documentation would reveal the exact same information that is available through their online databases.

So, my reply to Mr. Bharara’s statement is – I would love to be a “smarter” investor and “trust, but verify”, but how can I do that when the people and organizations we entrust to “protect our interests” seem to only care about themselves and stack the deck against us?

If you’re going to shift responsibility onto the individual investor for preventing Kenneth I. Starr’s alleged crimes, why not use some of that Federal and State taxpayer money wasted on our inept and incompetent regulatory agencies, to make the verification process simpler and easier?