Regulators up estimates of HMC issueThe company did not contest charges made by state securities officials.
June 9, 2008 · Updated 3:59 PM
"The state securities division has made permanent its order shutting down stock sales in Bainbridge-based Health Maintenance Centers, Inc., as neither HMC nor founder Kevin Lawrence contested allegations of improper conduct.And as the state's probe continues, state investigators say the number of investors and amount of money raised may be greater than first thought.This is the biggest case in my 20 years, said Deborah Bortner, Washington State Securities Administrator and department spokesperson. There is so much money and so many people involved.The Securities Division issued a summary cease and desist order against HMC and Lawrence on April 9, charging them with selling unregistered stock worth at least $9 million to more than 1,100 investors.Both defendants were given an opportunity to request a hearing and defend against the allegations. Because neither asked for a hearing, the allegations are deemed admitted, and the summary order will become permanent, Bortner said.Examination of bank records and shareholder lists provided by HMC suggests that the early estimates of money raised and investors involved were conservative, she said.I'd say there are at least a couple of thousand people from all over the country who bought stock, Bortner said. She and chief investigator Martin Cordell estimated that the amount raised could approach $40 million.The priority for investigators is to find out where the money went, Bortner said.We anticipate taking further action against other entities and individuals, she said, but we can only decide what to do after we know where all the money went. This is going to go on for a while.An HMC spokesperson said Tuesday the firm did not appeal the cease and desist order since the order required HMC not to violate the state securities law, which HMC is not doing. The spokesperson had no further comment.In an earlier letter to the Review, Lawrence said HMC Inc. has focused on developing the legal infrastructure of an integrated health model and developing the MOFA (medical open file architecture)...HMC Inc. has been nurturing the proof of concept through utilization of their assets by Bainbridge HPC, a health and fitness facility in Winslow.Stock historyThe state's cease-and-desist order alleges that HMC, which operates the Human Performance Center on Madison Avenue, sold shares of stock at $1 each in minimum amounts of 5,000 shares. Under state law, HMC was required to provide investors with a written prospectus stating, among other things, how the money was to be used and providing information about the financial position of the company. The summary order says that HMC did not provide that information.Similarly, the order says that HMC was required to register with the Securities Division before selling its stock, which again involves providing detailed financial information. No registration was ever filed, the order says.Under state law, investors who buy unregistered securities may rescind the purchases, and receive their money back with interest, plus attorneys' fees. Sellers of such securities can avoid that liability by undertaking what is called a registered rescission - an offer, filed with the state, to refund the purchase price plus interest.When the state filed its original cease-and-desist order, HMC prepared a message to investors and friends stating, among other things, that it planned to make a registered rescission offer to its shareholders . . . as soon as possible.No such offer has been registered, Cordell said.They have to make the same kind of disclosure in the rescission registration as in a stock registration, he said, so investors can decide whether rescission is a good deal.The other requirement, Cordell said, is that a registered rescission offer must be made to all shareholders, not to only a few.Anyone who makes that kind of an offer has to have enough money to refund purchases to anyone who asks, he said.Cordell said there has been no move to offer HMC shareholders an opportunity to swap their stock for stock in Znetix, another Lawrence-founded company. The cease-and-desist order stated that many HMC investors had been told that Znetix would become a public company, and that they would be offered an opportunity to make such an exchange.We keep getting calls from investors with questions, Cordell said.Two recent lawsuits filed against Znetix for non-payment of obligations have been settled, court records show. In May, MBI Systems sued Znetix for $50,000 allegedly owed for office furniture. After a default judgment was entered against Znetix for the amount claimed, the matter was settled, King County Superior Court records showed. In August, the owner of the Rainier Tower office high-rise sued Znetix in King County Superior Court for back rent, claiming it was owed a total of $31,000 on an office that rents for $8,000 per month. But that obligation was later paid off, according to attorneys for the landlord.Znetix did sponsor two hydroplanes in the recent Seafair races on Lake Washington, and sponsored a promotional bat giveaway at the Aug. 21 Seattle Mariners game. "