Feds sue HMC/Znetix to halt '$74 million securities fraud'
June 9, 2008 · Updated 4:10 PM
The federal Securities and Exchange Commission Wednesday filed suit against Znetix, Inc., Health Maintenance Centers, Inc., and principals Kevin L. Lawrence and Donovan C. Claflin and others, to stop what it called an ongoing $74 million securities fraud scheme.
Federal District Judge John C. Coughenour issued a temporary order freezing the assets of the various defendants and preventing any further sale of stock in HMC or Znetix, pending further proceedings.
The action, filed in U.S. District Court in Seattle, was taken in order to protect existing and future investors from additional harm, said Michele Wein Layne of the SECs Pacific Regional Office in Los Angeles.
Deborah Bortner, chief of the securities division of the Washington State Department of Financial Institutions, called the case the biggest home-grown securities fraud weve ever seen in Washington.
The state DFI has been working with the SEC in the year-long investigation, Bortner said. Other agencies involved were the Federal Bureau of Investigation and the U.S. Attorneys Office, according to an SEC news release Wednesday.
A spokeswoman for HMC said Wednesday that she had not seen the complaint, and declined to comment. Attorneys representing the defendants would comment Thursday, she said.
Lawrence, 36, of Bainbridge Island, is founder and CEO of HMC and Bainbridge Human Performance Center, which operate a fitness center on Madison Avenue, and founder and chairman of Znetix, Inc.
The SEC alleges that Lawrence and Donovan C. Claflin, 31, of Redmond, told investors that HMC and Znetix were in the process of developing medically integrated health clubs.
The complaint alleges that the two sold stock to more than 5,000 investors nationwide. Investors were told that Znetix would go public in an Initial Public Offering (IPO) in the near future, and that HMC investors would receive four shares of Znetix for each share of HMC.
The SEC further alleges that Lawrence and Claflin told investors that they could immediately sell their shares in the IPO for $3 to $60 a share, when, in fact, there has been no IPO nor is one possible in the foreseeable future.
Znetix purports to market...a combined fitness and medical facility, design and market medical equipment, and create software analyzing a users performance on fitness equipment, but in fact has no existing operations, the SEC alleges.
Also according to the complaint, Lawrence and Claflin used more than $16 million, or 22 percent, of investor funds to their own benefit or the benefit of others.
The SEC release alleges that nearly $14 million was used to finance Lawrences grossly lavish lifestyle, which included spending $2.1 million purchasing at least 23 automobiles including exotic cars such as a Lamborghini and Vipers for himself.
According to the complaint, Lawrence also spent almost $500,000 on cars for family and friends; $2 million on homes, and $1 million on boats; and $330,000 on an engagement ring for his fiance.
Last April, the state securities division issued a cease and desist order against Lawrence and HMC, claiming that the HMC stock they were selling had never been registered as required by law. The order prevented further sales of HMC stock.
The suit filed by the SEC this week alleges that thereafter, Clifford G. Baird of Scottsdale, Ariz., sold some $17 million worth of stock in entities called Cascade Pointe of Arizona, LLC and Cascade Pointe of Nevis, LLC, ostensibly to enable those entities to acquire the majority of the common stock of HMC. The SEC alleges that those entities were actually created to evade the cease and desist order against Lawrence and HMC in Washington.
The suit also names several relief defendants, who are not charged with violations of federal securities laws, but are charged for the purpose of recovering proceeds that they illegitimately received from the HMC/Znetix stock fraud.
Those relief defendants were described by the SEC as:
-- Bainbridge Human Performance Centers, which the SEC described as a Washington professional limited liability company nominally owned by a Znetix employee and controlled by Lawrence;
-- Kimberly Alexander, also known as Kimberly Millar, Lawrences sister;
-- Bonnie M. Couch, Lawrences mother;
-- Vicki L. Lawrence, Lawrences "estranged wife," and;
-- Stacy Gray, Lawrences "fiancee and an employee of either HMC or Znetix."
The temporary order was issued without notice to the defendants. Federal law permits so-called ex parte injunctions when the applicant can demonstrate that notifying the defendants might cause further harm.
Temporary orders can last no longer than 10 days. Judge Coughenour set a hearing for 10 a.m. Jan. 31 to determine whether the orders should be extended to the time of trial.
Bortner said the state will continue its own investigation, and that additional defendants might be named. She hopes the SEC action will induce more investors to co-operate, she said.
The ones who invested smaller amounts have started to get tired of the promises and start to talk to us, she said, but those who invested a great deal of money have not been pounding down our door.
Bortner said large investors believed that the charges against Lawrence and HMC filed by the State of Washington might somehow be resolved, and that their investments might somehow be returned.
I hope they realize this is not just one little agency involved, she said.