Last Updated Jun 2, 2010 4:49 PM EDT
It's not the size of the fraud, which is estimated to be about $30 million that is saddening. It's that it involved some of the most basic techniques used by these types of crooks. Promises of out-sized returns, special investments, complete control and the lack of independent third parties who check and verify investments were all hallmarks of this scheme.
The allegations and charges state that instead of investing their money into the investments he recommended, Mr. Starr directed money to investments in which he had a personal interest, and he converted the money for his personal use, including buying a $7.5 million apartment in Manhattan.
What's surprising is that Mr. Starr was able to perpetrate his fraud on some of the most sophisticated high net-worth clients - some very famous and successful celebrities. Where were their accountants and attorneys? Officials say the fraud was only uncovered when clients made demands for payments that Starr could not deliver....and when that happens it's too late.
Like other high profile investment frauds, this advisor seemed to concentrate on serving a close knit group of clients. But the result is always the same: initial clients aid the swindler by serving as references to new unwitting investors. And the investors seeking out-sized returns from the sure-thing investment scheme have their only their worst enemies to blame: greed and blind trust.
Here are the signs to look for that point to an investment fraud so you can avoid one before getting involved.
Tireless Self Promotion: Advisors who flaunt their wealth and high returns are often doing so to create the appearance of success. This is one of the most powerful things the promoter does to attract investors. But this is perhaps the easiest way to spot a fraudster. Any legitimate investment involves risk, occasional losses and returns that are in line with the performance of the markets in which they participate.
Exclusive and Private Deals: Often the promoter of an investment scheme will have a compelling pitch that involves an air of exclusivity, self created track records of returns and claims of relationships with high profile and famous investors. Remember that seeing is believing. Be leery of investment deals that can't be checked out in person.
Third Party Custody Lacking: Ask the advisor who will be preparing all account statements and transaction confirmations and who handles all transactions and bookkeeping. If the answer involves the advisors firm handling these directly or by a firm on another country, then don't get involved. Instead look for all custody services - holding of positions, account statements, transactions and confirms - to be provided by a national brokerage firm. Advisors and their firms who do provide custody services are required under SEC rules to hire an independent CPA to perform a regular surprise examination of the advisors books, records and clients assets.
Beware Full Powers Of Attorney - clients can typically grant their advisors two levels of account access: limited and full. Under limited account access, an advisor can view statements, call the broker firm to make account inquiries and assist the client with transactions. Under full a power of attorney access, the advisor often has full discretion, can make transfers to and from accounts and even change private personal profile information. In most investment frauds, clients have granted full powers to the advisor.