Wall Street cops get tough

NEW YORK (CNNMoney.com) -- The government unveiled two high-profile cases of financial fraud Thursday as federal regulators look to crack down on Wall Street shenanigans.

The Securities and Exchange Commission said Pequot Capital Management, a Connecticut-based hedge fund, agreed to pay $28 million to settle insider trading charges dating back to 2001.

Separately, federal law enforcement officials arrested a New York-based investment advisor, Kenneth Ira Starr, on charges of running a $30 million fraud that implicated a local politician.

According to the SEC's civil complaint, Pequot's founder and chief executive, Arthur Samberg, sought inside information from David Zilkha, a former Microsoft employee who had recently been offered a job at Pequot, about the technology company's quarterly earnings statement.

Samberg closed Pequot last year amid allegations of insider trading. The Connecticut-based fund, founded in 1998, had been among the largest hedge funds in the world, with as much as $15 billion under management at one time.

A spokesman for Samberg and Pequot declined to comment.

Samberg, 69, and Pequot settled the charges without admitting or denying the SEC's allegations against them.

Zilkha, 41, is being charged in an administrative proceeding on charges he defied a subpoena and direct questions about information he had received regarding Microsoft's earnings during a previous investigation. A lawyer representing Zilkha was not immediately available to comment on the charges.

"The cases have two particularly troubling aspects," said Robert Khuzami, director of the SEC's Division of Enforcement. "A hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation."

Meanwhile, the U.S. Attorney's Office in New York said Kenneth Starr, who managed money for "high net-worth and celebrity clients," defrauded his clients of at least $30 million.

Prosecutors said Starr, through his investment firm Starr & Co., transferred funds from clients in a way that was characteristic of a "Ponzi" scheme. He also solicitied money from clients for what he said were "sure deals," which he used to fund risky investments for his personal gain, prosecutors said.

In addition to the criminal charges, the SEC filed a civil complaint against Starr on Thursday.

"Today's charges against Kenneth Starr seem to confirm what has become all too apparent lately," said U.S. Attorney Preet Bharara. "Anyone can be a victim of financial fraud. Whether you are an ordinary citizen or a savvy businessman or a sophisticated celebrity, you can be victimized."

Starr allegedly used $5.7 million from the personal or business accounts of a nearly 100-year old heiress to buy a luxury condominium in New York, worth at least $7.5 million, in early April.

In another example, prosecutors said Starr defrauded a former hedge-fund manager and well-known philanthropist, by transferring $2.2 million of her money to an associate. He was only authorized to transfer $500,000, according to the complaint.

Among the other victims of the alleged fraud are an actress with whom Starr had a "long-standing and close relationship" and a wealthy jeweler, who was allegedly defrauded of nearly $14 million between 2008 and 2009.

In connection with the case, federal law enforcement officials also arrested Andrew Stein, the former President of the New York City Council, on related charges that he made false statements to the Internal Revenue Service. Stein allegedly concealed information about a shell company that Starr had created for his alleged schemes.

"Today's legal action sends a signal to those would-be investment fraudsters that they are not above the law," said IRS special agent Patricia Haynes.

Starr, 66, and Stein, 65, were arrested Thursday in New York and are expected to appear in federal court there later this afternoon.

The cases are the latest in a spate of enforcement actions the SEC and other regulators have taken against financial firms in recent weeks. The SEC, which failed to spot the largest Ponzi scheme on record last year, has stepped up its efforts significantly.

In April, the SEC brought fraud charges against Goldman Sachs (GS, Fortune 500), once the most respected name on Wall Street, for defrauding investors in the sale of mortgage-backed securities. The agency is also pursuing charges against the hedge fund Galleon Group, which allegedly made $25 million in illegal gains from 2006 to 2009.

More recently, regulators arrested a former Disney worker and an accomplice Wednesday for allegedly selling inside information about the company to hedge funds.