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Znetix sparks new round of lawsuits

If investors in Bainbridge-based Znetix and Health Maintenance Centers are to see any of their money again, the court-appointed receiver will have to find a “deep pocket” to successfully sue.

Receiver Michael Grassmueck in January filed an action against 41 former officers and directors of the now-defunct corporations, including retired sports luminaries Kareem Abdul-Jabbar and Eric Dickerson, and boxer Laila Ali, daughter of ring legend Muhammad Ali.

But there was some indication that the real target of the suit may be the companies that issued policies of officer and director liability insurance.

“The lawsuit will give rise to claims under a policy of insurance related to errors and omissions by officers and directors,” Grassmueck wrote last month in a report to Seattle federal Judge Marsha Pechman.

The suit claims officers and directors failed to discharge their duties to the companies themselves and their shareholders, and instead permitted founder Kevin Lawrence of Bainbridge Island to loot the companies.

Grassmueck was appointed receiver in February 2001 at the behest of the federal Securities and Exchange Commission, which alleged in a civil lawsuit that Lawrence and associates induced thousands of investors to sink some $91 million into Znetix, HMC and two limited partnerships bearing the name Cascade Pointe.

The SEC claimed that Lawrence and others promised to use the money to develop a new method of integrating fitness and medical care. The fitness center on Madison Avenue formerly operated by HMC, touted as a prototype of the concept, was the only operating asset of the company, the SEC charged.

Instead of using the money to develop a business plan, the money actually was used to finance the lavish lifestyles of Lawrence and his family, friends and associates, the SEC alleges.

The new lawsuit, filed in Seattle federal court, alleges that the officers and directors should have made themselves aware of Lawrence’s activities and acted to prevent them, including, if necessary, taking legal action against him.

Instead, the suit claims, the officers and directors chose instead to protect their positions and compensation.

“They knew that the only way they could keep their jobs and keep their positions of power was to turn a blind eye to Lawrence,” the suit claims.

In addition to the celebrity athletes, who the suit claims were Znetix directors at unspecified times, the suit names as defendants Charles Dillman, former president of Znetix, and Nancy Miggins, a Znetix vice president.

The suit seeks unspecified damages, but asks for a minimum of $10 million. Grassmueck declined to comment this week, beyond the allegations of the complaint.

Other than potential lawsuit recoveries, there are few if any assets from which investors could be repaid, according to the report Grassmueck filed Dec. 31, 2002.

The companies themselves are virtually broke, the tangible assets are enough only to pay the cost of receivership for another year, and the ideas that prompted thousands of people to part with millions of dollars are commercially worthless, according to that document.

Lawrence was indicted last year on 64 counts of fraud and conspiracy. He is being held without bail in the SeaTac federal detention facility awaiting trial, presently set for September. Four Lawrence associates have pleaded guilty to related charges, and have agreed to cooperate with the prosecution at Lawrence’s trial.

Grassmueck spent the remainder of 2002 attempting to locate and sell assets belonging to the companies or to insiders. According to his report, the assets sold for a total of $3.75 million. Some $1.4 million came from an August auction of personal property, including exotic cars and jewelry. The bulk of the rest was from the sale of real estate, mostly on Bainbridge.

But the auction fees, cost of real estate commissions and paying creditors who either loaned money with the property as collateral or performed services that improved the property lowered net recovery to $2.3 million, and Grassmueck expects that pattern to continue.

“(T)he receiver does not anticipate large recoveries from the sale of the real properties because all...are encumbered with liens of secured creditors and taxing authorities,” he wrote in his report.

Grassmueck spent $1.16 million on the effort, largely for legal and accounting fees and for the rent paid on various office and warehouse properties, mostly on Bainbridge, in use until the auction.

Cash on hand at the end of the year was $1.3 million – enough for another year of the receiver’s operations. Grassmueck is also looking at who may be legally liable to Znetix and the other companies.

In addition to the recent action against officers and directors, he has filed suit against the Seattle law firm of Ogden, Murphy and Wallace, which acted as attorneys for the companies and Lawrence. The suit claims a conflict of interest existed, and that the law firm sacrificed the company interests in favor of Lawrence’s interests.

The law firm denies the allegations, and says it acted in a professional manner at all times. The suit, which seeks $50 million in damages, is set for trial in May 2004.

Barring the discovery of a trove of money in an offshore account – something that has been extensively investigated with few results – the lawsuits are the only remaining assets of any significance.

“Based upon the value of the companies’ real and personal property, such litigation stands as the only real source (of) recovery for investors,” the report says.

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