Znetix, council dominated 2002 -- Year in review, part one

We suspected something might have been fishy, but we didn’t have an inkling of how big that fish might be.

In 2001, the state Division of Financial Institutions had ordered Bainbridge-based Health Maintenance Corporation and Znetix to cease selling unregistered stock. Although founder Kevin Lawrence and his associates would never comment to the press, they repeatedly assured investors that all would be well.

They were wrong.

Last January, the federal Securities and Exchange Commission filed a civil suit, claiming that the companies and successor entities had sold some $90 million in stock, and that virtually none of the money was left. A month later, the court shut down the companies and appointed a receiver who liquidated the assets.

And a year later, with Lawrence awaiting criminal trial, the saga of what state officials are calling the largest Washington-based stock fraud in history is far from finished.

The other story that dominated the year’s news came from city hall. Three new council members and a new mayor were sworn in after a campaign in which they were so closely aligned that some believed they were running a cooperative campaign.

But any amity fell apart immediately, as the council, especially the new members, bickered with the mayor about their respective roles, staff and office space.

Here is a month-by-month recap of the first half of 2002:

January – The federal Securities and Exchange Commission filed a civil lawsuit in Seattle federal court charging Health Maintenance Corporation and Znetix, along with founder Kevin Lawrence of Bainbridge Island, with bilking investors out of some $74 million, with millions more raised by related entities in Arizona. The suit said that while Lawrence told investors that the companies were working on a revolutionary method of integrating fitness and health care, investor proceeds were actually used to finance extravagant lifestyles for Lawrence, his friends and colleagues.

A new mayor and three new city council members took office, and the new council members said they wanted to play a more active role in setting city policy than had previous councils.

Former Oregon state legislator and Portland airport director Mike Thorne was named CEO of Washington State Ferries.

Bainbridge Island historian and lifelong resident Katy Warner died at age 84.

February – Voters countywide resoundingly shot down a proposed charter for Kitsap County that, among other things, would have expanded the number of commissioners from three to five and elected each by district. Though the document was perceived as having a pro-Republican and anti-Bainbridge slant, it lost in all areas of the county except South Kitsap.

Facing organized opposition for the first time in years, the two-year maintenance and operations levy for the Bainbridge park district failed by a handful of votes to obtain the constitutionally required super-majority 60 percent approval margin.

After learning that virtually all of the estimated $90 million raised from investors had disappeared, federal judge Marsha Pechman shut down operations of HMC and Znetix. The court-appointed receiver immediately closed the gym on Madison Avenue, the only actual operation of any of Lawrence’s companies.

March – The Bainbridge Island School District settled its long-standing case against the various parties involved in building Woodward Middle School for $3.5 million. The building’s outer envelope leaked profusely, allowing extensive mold growth. District officials said the settlement would pay for all the costs of repair, including reimbursing the district for work it had already done.

In a long-running criminal case, former Eagle Harbor liveaboard Ralph Leonard was found guildty of assault with a deadly weapon for shooting at a Bainbridge police officer who boarded Leonard’s boat to investigate a complaint. Leonard, who pled not guilty by reason of insanity, had been in and out of mental institutions since the 1998 incident.

April – Islanders Mike and Alexa Rosenthal reopened the Madison Avenue gymnasium as Island Health and Fitness. Although operated under an arrangement with the court-appointed receiver, the business hade no connection with former gym operator HMC.

The cash-strapped Washington State Ferries raised fares by an average of 12.5 percent on top of a 20 percent increase the previous year. Meanwhile, WSF agreed to pay $4.5 million to Rich Passage property owners for damage caused by fast-ferry wake.

May – The simmering rift between the new city council members and Mayor Darlene Kordonowy reached a boiling point when Bill Knobloch made a written request for changes in the way council meetings were conducted, including a rule that the mayor speak only when asked to do so. Knobloch further suggested possible abolition of the mayor’s position, going to a form of government with a council and a city manager.

After a one-year hiatus, both the boys and girls lacrosse teams from Bainbridge High School won state championships. For the girls, it was their second title in three years, and for the boys, their ninth in ten years.

June – A study by consultant Anthony Gibbons showed that downtown businesses would not receive enough benefit from a central parking garage to pay the estimated $5.5 million cost, essentially ending the short-term discussion about such a project.

The court-appointed receiver reported that Kevin Lawrence’s companies HMC and Znetix spent as much as $100 million as fast as the money was received from investors, earning less than $4,000 in interest.

State auditors issued a scathing report on city finances, claiming that records were missing or improperly kept. The city filed timely reports only twice in the last 20 years, the state said.

The Washington State Patrol initiated, then quickly terminated, random searches of vehicles waiting to board the ferries. Although few motorists complained, legislators cited concerns about civil liberties.

Saturday: The year in review, part 2.

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