Feds: HMC/Znetix a $74 million fraud
June 9, 2008 · Updated 4:10 PM
Lacking proper financial records some of them allegedly burned by the CEOs wife and even a marketable product, principals in a Bainbridge health club defrauded investors nationwide through $74 million in stock sales, federal regulators charge.
The federal Securities and Exchange Commission Wednesday filed suit against Znetix, Inc., Health Maintenance Centers, Inc., founder and CEO Kevin L. Lawrence, principal Donovan C. Claflin and several others.
Investigators allege that Lawrence used investor funds to lead a grossly lavish lifestyle, spending millions of dollars on cars, boats and property.
A federal judge issued a temporary order that freezes the assets of the various defendants and prevents any further sale of stock, pending further proceedings.
A hearing is slated for next Thursday in U.S. District Court in Seattle, in what one regulator called the biggest home-grown securities fraud weve ever seen in Washington.
The action was taken to protect existing and future investors from additional harm, said Michele Wein Layne, deputy assistant director of the SECs Pacific Regional Office in Los Angeles.
Also on Wednesday, law enforcement activity was reported at a Miller Road property owned by Lawrence. Responding to inquiries, a Bainbridge Police spokesman said the department assisted agents from the Federal Bureau of Investigation in executing a search warrant, but declined further comment. A spokesman at the FBI office in Seattle also declined comment.
While Wednesdays SEC action was civil seeking only fines, restitution to investors and an injunction against future violations criminal proceedings may ensue, said Deborah Bortner, chief of the securities division of the Washington State Department of Financial Institutions.
We are not prosecutors, she said, but we will turn our evidence over to prosecutors for their evaluation.
An HMC spokeswoman said Wednesday that she had not seen the SEC complaint, and declined to comment. Unnamed attorneys who the spokeswoman said would contact the Review did not do so.
Calls Thursday and Friday to the spokeswoman and other company officials, including Lawrence, were not returned.
Lawrence, 36, of Bainbridge Island, is founder and chairman of Znetix, Inc., and is founder and CEO of HMC and Bainbridge Human Performance Center, which operate a fitness center on Madison Avenue.
According to the SEC complaint, 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 suit alleges that the two sold stock to more than 5,000 investors nationwide. Znetix was to go public in an Initial Public Offering, with investors receiving four shares of Znetix for each share of HMC. Investors were told they could immediately sell their shares in the IPO for $3 to $60 a share, the complaint alleges, when, in fact, there has been no IPO nor is one possible in the foreseeable future.
SEC court filings made available this week charge that since June 1999, Lawrence and Claflin were telling investors that the Znetix IPO would occur within specific time periods ranging from one month to three years. Not only has the IPO not happened, but Znetixs chief financial officer told Lawrence in 2000 that the company was not ready to go public, in part because financial records were lacking, according to an affidavit.
HMC and Znetix never had any books and records. Indeed, the companies did not even maintain a check register, the documents say.
Although 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, it had no operations at all, securities regulators charge.
Charles Dillman, former Znetix CEO, told investigators in a deposition that the medical equipment and software did not exist, but were merely goals of Znetix.
The SEC alleges that Lawrence and Claflin used at least $16 million some 22 percent of investor funds for their own benefit.
Nearly $14 million was used to finance Lawrences grossly lavish lifestyle, investigators charge, with $2.1 million spent on 23 automobiles exotic cars such as Vipers and a Lamborghini. 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, the complaint says.
What Znetix did do was advertise.
The company sponsored a large billboard at Safeco Field last year, and several hydroplanes on a professional racing circuit. It also induced Los Angeles Laker center Shaquille ONeal to wear a Znetix hat during the celebration for the teams National Basketball Association championship last year.
The lawsuit comes some nine months after state securities officials issued a cease and desist order against Lawrence and HMC, claiming that the stock they were selling had never been registered as required by law.
The order prevented further sales of HMC stock; the company never contested those charges, and the order was made permanent.
The suit filed by the SEC this week claims that thereafter, Clifford G. Baird of Scottsdale, Ariz., sold $17 million worth of stock in entities called Cascade Pointe of Arizona, LLC and Cascade Pointe of Nevis, LLC, ostensibly to enable acquisition of the majority of the common stock of HMC. The entities were created to evade the cease and desist order against Lawrence and HMC in Washington, regulators allege.
According to the SEC court papers, Lawrence and Claflin controlled the Cascade bank accounts.
Kevin Lawrence testified for two days during Securities and Exchange Commission staff investigation, court filings say, then asserted his Fifth Amendment privilege against self-incrimination and refused to answer further questions.
The SEC says that Claflin, Baird and a number of other people involved asserted the privilege at the outset, and refused to answer any questions at all.
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 illegitimately received from the HMC/Znetix stock fraud.
The relief defendants were described by the SEC as:
Bainbridge Human Performance Centers, 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.
Gray and Alexander refused to testify during the investigation, invoking their constitutional privilege. Vicki Lawrence and Couch testified that they know about (Kevin) Lawrence spending a substantial amount of company funds on personal expenses for himself and his friends and family, court filings said.
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, including destroying documents.
Regulators told the court that in November 2000 shortly after receiving a subpoena from state regulators (Kevin) Lawrence directed Vicki Lawrence to burn two or three large storage boxes of business records, including checks and bank statements.
A hearing is set for 10 a.m. Jan. 31 before U.S. District Court Judge Marsha Pechman, who will determine whether the orders should be extended and whether a receiver will be appointed to manage the Lawrence operations, including the HPC gym.