Kenneth Starr – the rise and fall of a Ponzi star

And, when clients sought to be repaid, Starr would transfer funds from other clients, consistent with a Ponzi scheme, prosecutors said.

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The scheme fails when the corrupt money manager is eventually unable to meet redemptions.

Many such frauds have been unraveled in the financial crisis, the most infamous of which was decades-long $65 billion fraud committed by financier Bernard Madoff. Madoff, 72, is currently serving a 150-year prison sentence.

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However, what's amazing is how Starr got away with the scam till now.

 The Rise  

Starr, who graduated from Brooklyn Law School and has an LL.M. in tax from New York University School of Law, rose from obscurity in Bronx by bagging a secure job in his brother's accounting firm and "used his access to famous and powerful clients to burnish an image of trustworthiness, leading clients to entrust him with control of their financial affairs," according to court documents.

The IRS, which has charged Starr with wire fraud, investment adviser fraud and money laundering, claims that Starr's clients, which include Hollywood actors Uma Thurman, Wesley Snipes, Sylvester Stallone, Al Pacino and Goldie Hawn, Hollywood directors Martin Scorsese and Ron Howard, celebrity photographer Annie Leibovitz, 99-year old heiress Rachel "Bunny" Mellon (widow of the Mellon family scion Paul Mellon), Jacob "Jacob the Jeweler" Arabov, illusionist David Blaine and former Secretary of State Henry Kissinger, entrusted about $700 million of assets at one time to him, which Starr used to splurge on himself or invest in risky projects in which he or his close associates, including his wife, a former pole dancer named Diane Passage, and his son, had an interest.

And, if you're wondering how he pulled it off, the case of Arabov, in particular, serves to explain his modus operandi. According to court documents, Starr met Arabov, who has a following among hip-hop stars, at a charity event in May 2006 and the following day he visited Arabov's flagship store in Manhattan and purchased a $77,000 watch. Later, he bought more baubles from Arabov's store, including a $70,000 diamond bracelet and a $32,000 wedding band, thereby gaining his confidence before confiding in Arabov that "he had many investments but he only permitted his close friends to invest in them" and promised returns of five and even ten times of the invested amount.

Not surprisingly, Arabov took the bait and eventually invested nearly $14 million. Unfortunately that was the last Arabov saw of his money, some of which was diverted to a shell company called Wind River connected to one of Starr's "associates" – Andrew Stein, a former Manhattan Borough president, who's being accused of lying to the IRS, withholding information about his ties with Wind River and tax evasion to the tune of over $2 million.

Starr also routed investor funds to Glassnote Entertainment Group LLC, which represents music artists and employed Starr's wife; Sundown Hills LLC, whose bankruptcy filing was signed by a "retired prominent basketball player" in January; Bregman Productions Inc., a movie production company; and Universal Identification Solutions LLC, a company Starr partially owns.

Like Arabov, Rachel Mellon invested over $6 million, falling for Starr's persuasions, most of which was splurged on a sprawling $7.5 million Upper East Side township condominium complete with five bedrooms, 6 1/2 bathrooms, a 32-foot indoor granite lap pool and a 1,500-square-foot garden.

Money invested by other clients were used for buying expensive jewelries for himself and his wife, that included a diamond wedding ring, an emerald necklace, a diamond bracelet, diamond chandelier earrings and a $77,490 five-time-zone watch, court papers said.