SEC Asks New York Court to Freeze Advisor's Assets in $7 Million Fraud Case

"Most investment advisers do not maintain physical custody of their clients' assets, and those assets are instead held by qualified third-party custodians such as a regulated bank or a registered broker-dealer," the release said, adding that in this case, client assets were held in a safe in Starr & Co.'s offices "despite the fact that Starr and his firms were not qualified custodians."

Starr Investment Advisors failed to comply with asset custody rules that require firms to engage an independent public accountant to perform yearly surprise examinations of client assets in the firm's custody, the SEC charges.

According to the complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without authorization. The transferred funds were used to buy a $7.6 million apartment on the Upper East Side in Manhattan on April 16. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without authorization. The other two investors have not been reimbursed, the SEC said.

The complaint also alleges that Starr transferred $1.7 million from the personal account of a client and the account of a charity in August 2009. When Starr attempted another $750,000 transfer from the same client in April 2010, the bank alerted the client, who then halted the transfer and demanded a reimbursement of all money.