By John Helyar and David Glovin

June 18 (Bloomberg) — Kenneth I. Starr knew how to
cultivate relationships with powerful people, and he did it in
the most transparent way — by serial name-dropping.

Dining with Starr in the Grill Room at the Four Seasons in
New York meant listening to him reel off bold-face names as fast
as he guzzled Diet Cokes, according to one occasional lunch
companion who asked not to be identified.

Certain people would come up again and again in his boasts,
according to a story in the June 21 issue of Bloomberg
Businessweek. Starr would say he had lunch with Peter Peterson,
co-founder of the private-equity firm Blackstone Group LP, or
that he and “Pete” were talking at the Council on Foreign
Relations, long chaired by Peterson, or that he had done
something with “Pete,” according to the companion.

Starr managed money for a living, and his relationship with
Peterson was one of his key assets. Rachel “Bunny” Mellon, the
99-year-old widow of the bank heir and philanthropist Paul
Mellon was a longstanding client, according to Alex Forger,
Mellon’s lawyer. It was his connection to the Mellons that
started Starr on his path to wooing the rich, according to
people who knew Starr and who asked not to be identified.

Starr’s career famously came to an end last month when
government agents arrived at his home on Manhattan’s Upper East
Side and found him hiding in a closet, prosecutors in Manhattan
said on the night of his arrest. His $7.5 million condominium,
which he shared with his fourth wife, Diane Passage, a pole
dancer, featured floor-to-ceiling windows, a granite lap pool,
and a 1,500-square-foot garden, financed with what prosecutors
said was plundered cash, according to a criminal complaint.

‘Secret’ Interest

Days after his arrest, a grand jury indicted Starr for
cheating 11 clients — Jim Wiatt, the former head of the William
Morris Agency, and actress Uma Thurman among them — out of $59
million.

Starr pocketed half that amount, while the other half was
placed in investments in which he or his friends had a secret
interest, prosecutors said. Starr has denied wrongdoing and is
being held at the Metropolitan Correctional Center in lower
Manhattan. The Securities and Exchange Commission brought its
own civil fraud lawsuit against Starr and Passage, seeking the
return of tens of millions of dollars.

The two haven’t yet responded to the SEC suit. A judge last
week extended the freeze on the couple’s assets at a hearing
attended by Passage, who looked uncharacteristically demure in a
pink cardigan and a black skirt. She declined all reporters’
questions except for one from Bloomberg Businessweek, about her
age.

“Thirty-four,” she said. “You can take a couple of years
off that if you want to.”

Elite Crowd

The disintegration of Starr & Co., which once managed more
than $700 million for about 175 wealthy individuals, exposes an
uncomfortable truth about the elite crowd he preyed on — that
wealthy, sophisticated people could be such easy marks for
fraud. While the numbers involved aren’t on the scale of Bernie
Madoff’s Ponzi scheme, Starr shared Madoff’s ability to create
an aura of exclusivity around himself that appealed to the
elite.

His allure was augmented by Starr’s attendance at
invitation-only business gatherings, such as Allen & Co.
President Herbert Allen’s annual media conference in Sun Valley,
Idaho.

Still, there is no special trick to Starr’s alleged con
game that one can glean from his indictment or the SEC
complaint. So how is it so many people so willingly allowed
their pockets to be picked?

The Herd

“Everyone follows the herd,” said Ken Springer, a former
Federal Bureau of Investigation agent and founder of New York-
based investigative firm Corporate Resolutions. “Everyone says
this guy is the best, and no one vets the people.”

Starr & Co. rose by buzz and fell by buzz. A court-
appointed receiver has reported that only 30 to 40 clients
remained with the firm, after scores of others left amid
repeated incidents of unauthorized client wire transfers and
money-losing investments.

Individuals once affiliated with Starr have typically gone
mum — Peterson declined to comment on either his relationship
with Starr or the accusations against him — or distanced
themselves from him. Millennium Technology Ventures, a venture-
capital firm that grew out of one co-founded by Starr and
Peterson, addressed the issue in a June 4 letter to investors.

‘Not Involved’

“He has not been involved in investment decisions for the
fund and has not been actively involved in any operational or
strategic decision-making capacity with the fund for many years
now,” wrote Daniel Burstein, one of Millennium’s two managing
partners who were once with Blackstone. In addition, he wrote,
“Mr. Starr has been removed from his role as a member of the
Special Advisory Board.”

Peterson remains a special advisory partner with
Millennium, according to the firm’s website. Burstein declined
to comment for this story.

Starr’s connections to Blackstone go back to the early
1990s, when the firm was considerably smaller than it is now.
Blackstone received $90 million from clients of Starr & Co.,
according to a lawsuit filed in 2009 by the estate of former
Starr client Joan Stanton.

Actor Wesley Snipes, for instance, put $1 million into
Blackstone, according to testimony in the actor’s 2008 tax-
evasion trial. Injecting himself as a middleman, Starr charged
clients for placing their money with the firm and pooled their
investments in partnerships he controlled, prosecutors said. The
Stanton complaint doesn’t claim that Blackstone was aware of
Starr’s motives.

‘Excessive’ Fees

The Stanton estate’s suit decried “excessive fees,” which
came on top of Starr’s regular ones. His annual charges rose
from $120,000 in the years after he began working with Stanton
in 1987 to $240,000 in 2004. The suit also accused Starr of
using the partnerships to prevent Stanton from having direct
communication with Blackstone.

Stanton committed $5.1 million to a fund called Blackstone
Domestic Capital Partners II, a Blackstone entity, her estate
alleged. Her money didn’t go straight to Blackstone Domestic,
according to the lawsuit. Stanton’s money was instead put with
that of other Starr clients in a $12.4 million pool he formed
called Blackstone Investors Partnership, which wasn’t affiliated
with the Peterson Blackstone, according to the complaint.

Stanton’s Blackstone Domestic returns were supposed to go
to a trust whose assets would be distributed tax-free to heirs.
Those Blackstone returns went to purposes unknown, according to
the Stanton estate’s complaint.

Venture Firm

By 1997, Starr and Peterson had grown close enough to
create and co-invest in a tech venture firm called P.S. Capital,
according to filings and a person familiar with the enterprise.
The vehicle’s chief financial officer and general counsel was
Ronald Starr, a son from Ken Starr’s first marriage, and it
created two investment funds totaling $13 million, according to
this person.

As Internet fever spiked around the year 2000, P.S. Capital
morphed into the more ambitious Millennium Technology Venture
Fund, which, according to press releases, raised $160 million of
investor capital, yielded more than two dozen technology
startups, and included “special limited advisory partners”
Peterson and Starr.

Dan Burstein, who previously had been a senior adviser to
Blackstone and chief investment officer of P.S. Capital, became
a managing partner of Millennium, as did Richard Kimball, then
Peterson’s son-in-law.

Settled Suit

The firm’s location in the same office building as Starr &
Co. enabled Starr to be active in the firm. He was “actively
involved in managing personnel matters,” according to a former
Millennium secretary named Mystery Masiello, who filed a
discrimination lawsuit against the company in 2003. She alleged
that when she told the firm’s leaders she was pregnant in July
2001, Starr said, “Oh great, now Dan is going to have to get a
new assistant,” referring to Burstein. The case was settled on
undisclosed terms in 2003.

The Millennium fund, launched just before the Internet
bubble burst, proved to be a dud. Its few successes — such as
the Internet security company Phobos, which was sold to
SonicWALL in 2000 — were overshadowed by big losses. About half
of the original $160 million has been returned to investors,
according to a person familiar with its finances who asked not
to be identified. Millennium is in the process of being wound
down, according to the June 4 letter to investors.

‘Land Rush’

“They were caught up in the Oklahoma land rush” along
with many other Internet investors, says Neil Livingstone,
former chief executive officer of GlobalOptions Group Inc., a
security company. GlobalOptions, which he said was the
Millennium Fund’s only non-tech investment and its top-
performing portfolio company after the bubble burst, went public
in 2005. It owed much of its success to business it received
directly from Millennium during the post-bubble malaise.

“We shut down a lot of their Silicon Valley companies,”
said Livingstone, who is now CEO of Washington security firm
ExecutiveAction. The firm was an early example of Starr’s
growing propensity to invest client funds “in questionable and
suspicious investments, often with a direct benefit to himself,
his wife,” or friends, prosecutors said last month in Starr’s
criminal complaint.

Starr also put his clients’ money straight into
GlobalOptions stock. In a February 2008 SEC filing by
GlobalOptions, Thurman and playwright Neil Simon together were
listed as owning almost as many shares as the company’s CEO,
Harvey Schiller.

New Incarnation

In 2004, Millennium was reinvented by Burstein as
Millennium Technology Value Partners, a provider of liquidity
for distressed tech companies in exchange for equity stakes. In
its new incarnation it has had some success, investing in
companies that were later bought by Amazon.com Inc., Microsoft
Corp. and AT&T Inc., and in April it closed a new $280 million
fund to new investors, according to Millennium’s press releases.

Starr was listed on the Millennium website as a “special
limited advisory partner” until February 2008. He effectively
ceased involvement when Burstein changed the concept, according
to people familiar with the firm.

Starr met Bunny Mellon when he was a young certified public
accountant with Manhattan-based Oppenheim, Appel, Dixon & Co.
The Bronx-born graduate of Queens College and Brooklyn Law
School loved the idea of handling taxes for one of America’s
richest families, according to a person familiar with the
situation.

Modest Dress

He absorbed his clients’ methods and desires, though he
dressed inexpensively himself. He was following the advice of
Paul Mellon, according to Livingstone, who recalls Starr
invoking this line from the philanthropist: “If you have a
bigger yacht than your clients, they won’t trust you.” The
Mellons led Starr to another big-fish Oppenheim client, Arthur
Stanton, who made his fortune as the first U.S. distributor of
Volkswagen Beetles.

Stanton and his wife, Joan, lived at one of Manhattan’s
finest addresses, 10 Gracie Square, according to a published
report of her apartment’s sale in February. The Stantons’
apartment served as a salon to many of the city’s elite. Joan
Stanton was an actress who had played Lois Lane in The
Adventures of Superman radio show, and their home was often
filled with performing artists, according to a person familiar
with the matter.

When their daughter turned 21, Leonard Bernstein led the
singing of Happy Birthday, the daughter, Jane Stanton Hitchcock,
once recounted in an interview. Arthur Stanton introduced Starr
to his social circle and endorsed his accounting. Film director
Mike Nichols and stage director Hal Prince became Starr clients.
Arthur Stanton died in 1987, leaving $60 million to his widow,
and Starr pitched himself to manage it for her, according to a
person familiar with the matter.

‘Predator’

The lawsuit brought against Starr by Joan Stanton’s estate
22 years later, soon after her own passing at age 94 in May
2009, portrayed him as a predator who defrauded her of “tens of
millions of dollars.” “Mrs. Stanton’s lack of financial acumen
was known to Mr. Starr,” according to the complaint. “Mr.
Starr began to cultivate Mrs. Stanton as a client who would come
to rely on his services exclusively.”

Starr left Oppenheim in 1987 to start his own firm, he said
in testimony at the 2008 tax-evasion trial of client Wesley
Snipes. Skills honed on the Mellons and Stantons served him well
in building a larger clientele, according to a person who has
known him professionally for years. The person describes Starr
as a master of ingratiating himself with people. He wasn’t
suave; he wasn’t a Madoff in appearance and charm; he was rather
abrupt.

Detailed Investments

So what was the appeal? This person describes Starr as very
bright and says he came across as sincere. He could sit down
with a piece of paper and map out detailed investments.

Starr’s reputation took its first public beating in 2002
when his client Sylvester Stallone sued him for keeping him
invested in Planet Hollywood from 1997 to 2001, as the
restaurant chain spiraled toward bankruptcy and the value of his
4 million shares withered. The actor accused Starr of putting
his friendship with Keith Barish, a founder of Planet Hollywood,
ahead of his fiduciary duty to clients, and sought at least
$10 million in damages.

The litigation, settled on undisclosed terms in 2003, was
an example of what prosecutors later said was Starr’s habit of
making decisions without his clients’ approval. In 2006, Starr
formed Starr Investment Advisors; regulatory filings indicate he
had 26 to 100 clients and 11 to 50 employees.

Two Funds

Starr placed $6.5 million of Bunny Mellon’s fortune into
two investment funds from 2005 to 2007 without informing his
longtime client that they were “highly speculative and risky,”
according to prosecutors. He also failed to “disclose certain
conflicts of interest,” according to indictment against Starr.
Barish didn’t return a call seeking comment.

Only in August 2009, when investigators asked Mellon’s
attorney about these illiquid investments, did her
representative become aware of the funds. Starr returned
$4.3 million to Mellon that month, according to the indictment.

Starr’s behavior outside the office also turned erratic
after taking up with Passage in 2005. He began to forsake his
own counsel about modest appearances, spending more than
$400,000 on jewelry from Jacob & Co., aka Jacob the Jeweler,
during the span of several months in 2006, according to the
criminal complaint.

Pole Dancer

In May 2007, he divorced Marisa Starr. He did so by filing
court documents without her knowledge that claimed she agreed to
end 16 years of marriage, according to her 2009 lawsuit. Starr’s
fourth wife was a flashy, jarring presence in Manhattan society
– tattooed, provocatively dressed and a pole dancer. She put on
a Poledance Superstar competition in New York in October 2009 to
raise money for a charity she started called S.P.I.N. (Single
Parents In Need), according to a website promoting the event.

Starr was proud of her, too, showing iPhone pictures of her
gyrating on a pole to fellow attendees at a Tribeca Film
Festival function in 2008, according to people who were there.

In early 2008, Starr recruited Jacob the Jeweler, whose
real name is Jacob Arabo, as an investment client. His money was
invested in “sure deals” that included Glassnote Entertainment
Group, which gave Passage a $150,000-a-year job, and Martin
Bregman Productions, a movie venture involving Marty Bregman, a
Starr client and a veteran producer of films such as Scarface,
according to the criminal complaint.

Prosecutors said Passage wanted to make the film version of
“The Desert Rose,” Larry McMurtry’s novel about an aging Las
Vegas showgirl. The two doomed ventures represented $2.7 million
of the $13 million of which Arabo was defrauded by Starr,
according to the complaint.

Strange Behavior

The same network that made Starr rich quickly undid him, as
stories of losses and strange behavior spread. Clients left the
firm, including Mike Nichols and his broadcaster wife, Diane
Sawyer, according to a person familiar with the matter.

Four months after Stanton’s death, her estate sued Starr
for “gross abuse of trust and confidence” over 20 years. The
Stanton complaint, combined with some individual complaints,
spurred the Manhattan District Attorney’s office and the SEC to
start asking questions.

Starr settled with the Stanton estate for an undisclosed
sum in January, according to a person familiar with the
situation. He also reached a $4 million settlement that month
with an unidentified playwright and screenwriter who complained
of being fraudulently induced to invest in a failed restaurant
chain, according to the indictment.

Top Clients

Starr raided other clients’ accounts to make the payment,
prosecutors said. In another winter development, a veteran
account manager for Starr named Arnold Herrmann left for rival
firm Citrin Cooperman & Co. and took some of his top clients,
according to a Feb. 11 Citrin Cooperman press release. One of
the clients was Barbara Walters, according to a person familiar
with the matter.

As his firm disintegrated, Starr tried to maintain
appearances. In February he borrowed $2.6 million from Los-
Angeles-based City National Bank, according to a lawsuit filed
by the bank on June 16, two weeks after Starr missed a $9,385
interest payment. At a March 10 meeting with federal
investigators, he said his firm had 200 clients. While that
would have almost been true at its peak, the list had dwindled
to less than a quarter of that by the time of his arrest,
according to the criminal complaints and a document filed in
court by the Starr & Co. receiver, Aurora Cassirer.

Final Straw

In April, prosecutors said, Starr bought the $7.5 million
condominium. This proved to be the final straw. On May 25, the
lawyer for Bunny Mellon, Starr’s first big client and one of his
last, was looking through her financial statements. He saw a
series of mid-April wire-transfers out of her Starr & Co.
account, totaling $5.75 million, according to prosecutors. Starr
had allegedly raided the account to close on his condominium.
The lawyer called the authorities. Two days later, federal
agents were removing him from the closet.

The civil case is SEC v. Starr, 1:10-cv-04270, and the
criminal case is U.S. v. Starr, 1:10-mj-01135, U.S. District
Court, Southern District of New York (Manhattan).

To contact the reporters on this story:
John Helyar in Atlanta at
jhelyar@bloomberg.net;
David Glovin in New York federal court at
dglovin@bloomberg.net.