Fraud indictments likely, feds tell judge
June 9, 2008 · Updated 4:15 PM
Saying it anticipates criminal charges against one or more defendants this year, the federal government is asking for a temporary halt to the civil securities-fraud cases against Kevin Lawrence and associates.
In a motion filed in Seattle federal court, the United States Attorneys office said that continuing the civil lawsuit filed by the Securities and Exchange Commission could interfere with criminal proceedings, convictions from which could put parties behind bars for 15 years.
Law enforcement agents who are pursuing the criminal investigation and may have developed confidential sources should not be hindered in their efforts by the threat of civil deposition subpoenas, assistant U.S. attorneys Jeffrey Coopersmith and Richard Cohen wrote in a brief supporting their motion.
Allowing targets of a criminal investigation through civil discovery to access such materials ... would significantly impede the criminal investigation, they wrote.
In a civil lawsuit, all parties are required to disclose relevant information in their possession, including the names of anyone with knowledge of facts, whether listed as possible witnesses or not.
Criminal discovery is much more restricted to guard against the possibility of witness intimidation and manufacturing of evidence, and generally protects the identity of confidential sources.
The SECs disclosures are due April 1, the court memo says, and the government wants a ruling from Judge Marsha Pechman before those disclosures are made. The motion is tentatively scheduled to be heard March 29.
The SEC civil suit, filed Jan. 23, claims that Lawrence, of Bainbridge Island, and associates sold $90 million in unregistered stock in Bainbridge-based HMC, Inc. and Znetix, and in two partnerships known as Cascade Pointe, one based in Arizona and the other on the Caribbean island of Nevis.
The suit claims that the securities were sold by means of various misrepresentations and omissions.
While investors were told their money would go for developing products in the health and fitness field, in fact, much of the money went to support the grossly lavish lifestyles of the principals, especially Lawrence, the suit says.
The suit claims that the companies had few business operations beyond the health club on Madison Avenue, which always operated at a loss.
The SEC suit names Lawrence, Donovan Claflin of Redmond and Clifford Baird of Seattle as individual defendants, and also names HMC, Znetix and the Cascade entities.
The suit asks for restitution of all money paid by investors, with interest, plus unspecified civil penalties.
The proposed stay would still allow the court-appointed receiver to continue locating and marshaling assets of HMC and Znetix, and would permit the receiver to file claims against those who might be liable to the companies -- including insurers who might have issued officer-and-director liability policies, and professionals who provided legal and other services to defendants.
Lawrence opposes the stay but other defendants do not, the government said.
The stay motion from the U.S. Attorneys office, which would prosecute any criminal cases, includes an affidavit from FBI agent Mark Meinecke, who said in the affidavit that the FBI is investigating Lawrence, Claflin and others for securities fraud, unlawful sale of unregistered securities, mail fraud, wire fraud and tax fraud.
The affidavit says that between 1998 and 2000, Lawrence and his now-estranged wife reported income totalling $1.057 million, but received over $3.6 million in cash, cars, boats, real estate and other items of value during that same period.
Current federal sentencing guidelines base the magnitude of criminal fraud penalties on the amount of money at issue. Under those guidelines, fraud in excess of $50 million involving more than 50 victims could be punished by up to 188 months in prison -- 15 years and eight months.