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Crowds throw money at Znetix auction; gym prevails

Bargain hunters check out the furnishings in the one-time office of Znetix founder Kevin Lawrence, during a Wednesday preview. - ROGERICK ANAS/Staff Photo
Bargain hunters check out the furnishings in the one-time office of Znetix founder Kevin Lawrence, during a Wednesday preview.
— image credit: ROGERICK ANAS/Staff Photo

When the hammer fell, so did the tears.

“Sold,” master auctioneer Jim Murphy declared, “for $160,000.”

And with that, Mike and Alexa Rosenthal bought the equipment in their Madison Avenue health club, prompting a tearful celebration among the couple’s friends and employees.

“We never did not believe we would be here,” Mike Rosenthal said. “This is about what we can do for the community, and we can do it now that this is all behind us.”

For a moment, it looked like the Rosenthals and partner Ubbe Lilleblad might take the package for their opening bid of $100,000.

But after court-appointed receiver Michael Grassmueck announced that he would accept that bid – meaning the equipment would be sold as a package, rather than item-by-item – another contestant emerged. The other bidders, two men who declined to identify themselves but said they are opening health clubs in the South, dropped out after Lilleblad topped their $155,000 attempt.

After a busy weekend that will be devoted to cleaning up the gym – and in all likelihood to the birth of the Rosenthals’ second child – the team will re-open the gym Monday morning at 4 a.m.

The gym auction was the second of four events spread over three days to dispose of property amassed by Kevin Lawrence and his Bainbridge-based companies HMC and Znetix, who federal prosecutors charge with bilking investors out of as much as $100 million.

A federal judge appointed Grassmueck as receiver in February, after the Securities and Exchange Commission filed a civil lawsuit against the Lawrence companies.

Grassmueck is charged with finding and securing whatever assets may remain, and developing a plan for returning those funds to creditors and, perhaps, investors.

Because Grassmueck is required to get maximum dollar for the assets, there was some concern that large national chains might enter the picture on terms that the Rosenthals could not match.

That didn’t happen, Mike Rosenthal said, because building principal Dick Bowen gave the Rosenthals a long-term lease on the former bowling alley, meaning anyone else who bid for the gym equipment would have to move it.

“I know how much this means to the community,” said Bowen, who now lives on Whidbey Island but who came for Friday’s auction.

Bidding high

While the parking lot was full Friday morning, the orderly assemblage of perhaps 100 people was a sharp departure from the throng of more than 900 who showed up Thursday at the former Znetix office on Parfitt Way.

For a while, ostensible bargain-hunters paid surprisingly high prices for the computer equipment that went on the block first.

“I’m setting up an office and thought it would be a good chance to buy equipment, because there are quite a few printers,” said island architect Jed Thornburgh. “But people are paying $1,400 for a printer you can buy new for $1,500.

“There’s so much used computer equipment out there that you shouldn’t pay more than half that.”

Others agreed that prices made little sense.

“This stuff is a year to a year and a half old, and people are paying close to what you can buy new ones for,” said Malcolm Saunders of Bainbridge Island.

When the auction began at 10 a.m. Thursday, the scene resembled a rock concert more than a business transaction, as crowds lingered outside, unable to fit into the Znetix office lobby until others left.

Bidders filled the office hallways, many of them out of sight of the merchandise or auctioneer; bid amounts were relayed back and forth by auction assistants standing on chairs.

“We’ve had buyers register from all across the western United States,” said Terry Moore of the James G. Murphy auction company. “Where there’s a notoriety factor like this, it tends to bring in more curiosity seekers, but there are also a lot of our regulars here.”

Moore said that the Murphy company has some 40 different mailing lists of known bidders in various categories.

On the block were hundreds of items ranging from laptop computers, to fully furnished offices, to Rembrandt prints, to leftover Znetix promotional materials.

But the large crowds dwindled throughout the day, and by afternoon, there may even have been actual bargains.

“I think this is a good price,” said Brian Nelson, who paid $2,200 for an ornate mask in the northwest Native American style. Nelson said he had priced similar items at local galleries.

The executive chair in Lawrence’s office didn’t fetch any kind of premuim – it went for $175.

“For a chair that a guy who raised $91 million sat in, I kind of expected more,” said one attendee who camped in the corner office that had been Lawrence’s, but decided not to bid.

Grassmueck was pleased with the results, at least in the early going.

“Prices seem to be pretty good,” he said. “We may be able to clear $1 million this weekend.”

The Thursday auction brought in roughly $220,000, he said.

Most of the revenue is expected to be generated at today’s auction of some two dozen cars, plus an assortment of boats, off-road vehicles, miscellaneous vehicles such as a fire engine and an array of jewelry.

The auction, which begins at 10 a.m. to conclusion at the Murphy company’s Kenmore offices, is expected to attract as many as 4,000 people, one company official said.

Assets

Federal regulators charge that Lawrence raised as much as $100 million by selling unregistered stock in Health Maintenance Centers, Znetix and entities called Cascade Pointe.

While the companies were supposedly developing a new model of integrated fitness and health-care services, of which the Madison Avenue facility formerly operated by HMC was to be a prototype, investigators charge that the money actually went to support the lavish lifestyles of Lawrence, his family, employees and associates.

The 37-year-old Lawrence, who grew up on Bainbridge Island, is currently in federal custody awaiting an October trial on a 64-count fraud indictment. If convicted, he faces a maximum sentence of 560 years in prison.

Three associates have pleaded guilty and agreed to cooperate with the prosecution. They face prison terms of up to 10 years, and will be sentenced in October and November.

Grassmueck said the auction is a relatively small part of what he expects the total recovery of assets to be.

The more significant recovery will come through litigation, he said, against various insurance policies that cover directors and officers, and perhaps malpractice suits against attorneys associated with Znetix.

Other significant assets include Hawaiian real estate – presently for sale at $1.25 million – and the remainder of Lawrence’s Bainbridge holdings.

Grassmueck said he may also try to recapture alleged “fraudulent transfers” – money transferred to family or friends for the purpose of evading creditors – and what are referred to as “preferential payments” – money paid out within three months prior to the SEC filing suit.

Grassmueck estimated that total recovery could be as high as $20 million.

He said that forensic accountants believe they have traced the vast majority of the money the companies brought in. He does not necessarily believe that there is a large cache of money stashed offshore.

“We have found a number of offshore accounts, but the money put there then goes somewhere else,” he said. “We never actually find the money.”

Znetix principals, he said, simply spent phenomenal amounts of cash.

“Kevin paid a $1 million signing bonus to one employee who did absolutely nothing,” Grassmueck said. “You can burn through a lot of money in a hurry that way.”

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