Financial advisor to celebrities is arrested in fraud case

A financial advisor to the rich and famous, including such Hollywood stars as Sylvester Stallone and Wesley Snipes, was arrested Thursday on suspicion of using at least $30 million in clients’ money to fund his extravagant lifestyle — including a recently purchased $7.5-million condominium.

Kenneth I. Starr, 66, was charged with fraud and money laundering and held without bail in alleged schemes that siphoned money from wealthy clients, who were not named in the criminal complaint but described as a “hedge-fund manager and well-known philanthropist,” an “actress” and an “elderly heiress.”

Though the complaint by the U.S. attorney’s office did not specifically name any of Starr’s 200-plus clients, his roster has included other celebrities such as actress Uma Thurman, directors Martin Scorsese and Ron Howard and photographer Annie Leibovitz.

“Some of those clients were just pawns in a Ponzi scheme,” Preet Bharara, the U.S. attorney for Manhattan, said at a news conference in New York.

Michael Rosenberg, president of Howard’s production company, Imagine Entertainment, would say only that the filmmaker left Starr’s firm five months ago. Thurman declined to comment.

Stallone’s longtime publicist, Paul Bloch, said his client could not talk about Starr because of the confidentiality settlement he signed related to a lawsuit in which the actor had sued Starr over a soured investment.

Leibovitz, who has blamed Starr for bad advice, said Thursday in a statement that “news of Ken Starr’s arrest does not come as a complete surprise to me, and I will follow this story with great interest.”

Starr was held without bail after being deemed a flight risk. Authorities said that when they went to his condominium to arrest him, they found him in a closet behind coats and had to be pulled out.

Also charged was Andrew Stein, 65, a former New York City Council president, who was accused of lying to federal officers about a shell company Starr created and used for his alleged fraud schemes. Stein was released on $250,000 bond.

Lawyers for Starr and Stein did not return calls seeking comment.

Separately, the Securities and Exchange Commission filed a civil lawsuit against Starr and two of his investment companies, accusing them of investment advisor fraud. The SEC won an order freezing 23 bank accounts connected to Starr, as law enforcement authorities searched his office.

Starr is not related to the former independent prosecutor of the same name.

In the most brazen scheme detailed in the complaint, Starr is accused of putting the money of his clients into an escrow account and then using the money this month to pay for the Manhattan condo, which has five bedrooms and a 32-foot lap pool.

Federal and state prosecutors in New York said their investigations were continuing.

One notorious relationship Starr had was with Snipes, with whom Starr ended up in a public dispute after the actor was charged with tax fraud in 2006.

A lawyer for Snipes, Robert Barnes, said that after the actor hired Starr in 1993, Starr took control of nearly every aspect of Snipes’ financial life, down to his utility bills. Barnes said that Snipes eventually came to question the advice he was receiving and decided to find a new advisor.

But in a 2008 trial in which Snipes was convicted of misdemeanor counts of failing to file tax returns for three years, Starr testified that the actor had left him after he refused to help Snipes cheat on his taxes.

Barnes said that Starr was well connected to Hollywood business managers and would use that to get access to celebrities because “he knew entertainment clients were less likely to challenge him.”

In 2002, Stallone sued Starr for allegedly giving him bad advice on an investment in the chain restaurant Planet Hollywood, in which the actor lost millions of dollars.

During the 2008 trial of Hollywood private eye Anthony Pellicano, government prosecutors said that Starr had hired Pellicano to spy on Stallone.

Even more recently, Starr has ended up in the news after he advised photographer Leibovitz to use a financial firm to take out a large loan. That loan landed Leibovitz in legal hot water, and she complained publicly about the advice Starr had given her.

The federal criminal complaint details how Starr would befriend clients and then offer to put their money into companies with names such as Martini Park and Universal Identification Systems, the latter of which was allegedly providing voting machines for the Venezuelan government.

When the clients asked for their money, Starr “offered a series of shifting and far-fetched explanations for why the payment could not be made,” the complaint said.

At one point, after a client had been asking for weeks about a payment on the Venezuelan scheme, Starr promised in a recorded conversation that his son “just texted me that he is sitting down now with the vice minister and they are just waiting for the vice president to wake up and come downstairs and given them a kiss goodbye and be handed his check.”

That client was Jacob Arabov, better known as Jacob the Jeweler for the diamond encrusted watches and necklaces sold to the stars. In 2008, Arabov was sentenced to 30 months in prison for lying to investigators and falsifying records.

The complaint said that Starr promised to oversee Arabov’s fortune after he was sentenced to jail for money-laundering. Starr also spent money at Arabov’s business, buying a $77,490 watch and a 3.2-carat diamond and gold bezel, prosecutors alleged.

Arabov’s lawyer, Ben Brafman, said that Arabov and his wife “intend to pursue all legal remedies the law provides in an effort to recover their investments.”

Prosecutors said Starr sometimes put his clients money into investment deals in which he had a personal interest and other times he took the money for himself to pay for such luxuries as $150,000 summer rental house in the beach town of Bridgehampton, N.Y.

nathaniel.popper@latimes.com

Times staff writers Claudia Eller and Dawn Chmielewski contributed to this report.