When Kevin Lawrence Millar graduated from Bainbridge High School in 1984, the student yearbook named him “biggest spender.”

The yearbook was right.

According to a papers filed in Seattle federal court, the man who shortened his name to Kevin Lawrence and the companies he founded spent almost all of the $91 million raised from investors.

All told, court-appointed receiver Michael A. Grassmueck of Portland, Oregon, can only locate $52,000 in cash in bank accounts controlled by Lawrence-related companies, including Health Maintenance Corporation and Znetix of Bainbridge Island, and two partnerships known as Cascade Pointe, one based in Arizona and the other in the Caribbean island of Nevis.

At the same time, Grassmueck said Lawrence and and his associates owned 50 cars, 20 boats and 32 miscellaneous vehicles, including trailers, motorbikes and off-road vehicles. Grassmueck also found 132 pieces of art, including two Rembrandt works and a Dale Chihuly glass piece.

Lawrence, HMC, Znetix and Cascade have been named as defendants in a civil suit filed by the federal Securities and Exchange Commission in what state regulators have called “the biggest home-grown securities fraud in Washington history.”

The SEC claims that Lawrence and Donovan Claflin of Redmond were principals in selling some $74 million in unregistered stock in HMC and Znetix, allegedly by making misleading and incomplete statements. The SEC claims that after the state of Washington prohibited further sales of HMC and Znetix stock, Lawrence and a Seattle man named Clifford G. Baird formed the Cascade Pointe entities and raised another $19 million.

Lawrence filed an answer to the SEC suit in which he admits that investors put “multi-millions of dollars” into HMC, and admits that the stock was unregistered. He denied any wrongdoing, including any “specific intent to deceive, manipulate or defraud.”

Search for assets

Federal Judge Marsha Pechman appointed Grassmueck as receiver on Feb. 14. He and a small team have set up shop in the former Znetix offices on Parfitt Way, and have begun looking for assets. The enumeration of cash, vehicles, artwork and other assets was contained in a report Grassmueck filed with the court last week.

The health facility on Madison Avenue, which closed the evening of Grassmueck’s appointment, was listed as a company asset, but Grassmueck did not state when or if it would reopen.

“The facility appears to be well stocked with exercise equipment, and enjoys strong community support,” Grassmueck said in his report.

The inventory tallies over 100 exercise machines at the gym, together with considerable other equipment, belying rumors that much of the equipment was removed from the facility after the SEC filed its suit but before Grassmueck was appointed.

But Grassmueck went on to say: “The facility was operating at a loss at the time the Receiver was appointed. The Receiver has temporarily closed the facility to address cash flow issues and loss of insurance.

“The Receiver may reopen the facility if sufficient capital can be located, insurance is reinstated and the Receiver determines that it in the best interest of the receivership estate. Even if the facility is reopened, the Receiver may ultimately recommend selling it as a going concern,” he says.

In addition to the $52,000 cash on hand, Grassmueck identified $266,000 in a bank account that had been frozen by a creditor, and a $15,000 retainer held by an attorney.

Under Pechman’s order, all court action against any of the affected entities must be placed on hold, and all property seized to satisfy potential judgments must be turned over to the receiver. Grassmueck said he is seeking to take control of the additional money.

Grassmueck is also “coordinating with the U.S. Attorney and the FBI” to take possession of the fleet of vehicles, which includes two Cadillacs registered to Lawrence’s mother; five cars, including a Mercedes and a Ferrari, registered to Lawrence’s fiancee, Stacy Gray; and 30 cars registered to Lawrence himself, including four Hummers, three Mercedes, two Ferraris, three Land Cruisers, a Lamborghini and a custom-built Pantera.

Lawrence’s mother, sister, estranged wife Vicki and Gray are identified as “relief defendants.” The SEC does not claim that they violated any federal securities laws, but believes they may have received the benefits of others’ violations, which benefits the SEC seeks to recapture. Grassmueck said he has recovered a quantity of jewelry from the relief defendants.

BI properties

Other assets that Grassmueck identified include a parcel of real property on High School Road, long labeled the “future home” of the Human Performance Center. But the seller of that property, Dr. Richard Brobyn, told the Review that Lawrence has not paid for that parcel completely, and has taken out several other loans against that parcel of land, resulting in additional mortgages.

Indicating the economic impact on Bainbridge Island from the firms’ collapse, the report states that various Lawrence-related entities have five leases on the island, with monthly rents totalling almost $80,000. Leases on Bainbridge involve a portion of the Pavilion, the Madison Avenue building in which the gym is located, the Parfitt Building on the waterfront and two spaces in the Day Road Industrial Park area.

“The receiver is in discussion with all of its landlords and is determining which, if any, should be retained,” Grassmueck wrote. “The receiver is also evaluating the right of the receiver to obtain purported security deposits and unpaid rent.”

Other than the cash, jewels and vehicles, Grassmueck found little in the way of valuable assets. He said Znetix receives some $20,000 per month from certain consulting contracts, but spends $40,000 a month to fulfill them. Intellectual-property rights and a prototype exercise machine do not appear to have significant value, Grassmueck said.

Cooked books?

His search was complicated, Grassmueck said, by poor record-keeping and a multiplicity of bank accounts – as many as 110 accounts throughout the U.S. and the Caribbean.

“Znetix and Cascade’s funds were managed with apparent disregard for basic bookkeeping and accounting mechanisms,” he wrote. “Consequently, the typical financial records ordinarily found at a business are virtually nonexistent.”

The companies said they were pioneering the integration of physical fitness and medicine, but Grassmueck said he could not determine whether the companies had a concept that could become a viable business.

Meanwhile, Grassmueck posted “letters” to creditors and former Znetix employees on a Znetix web site. He said that at some point in the future, the court will set a “claim date,” and those who assert they are owed money by HMC, Znetix or the related entities may file claims. But because there are over 8,500 claimants, he said, he cannot answer individual queries at this time.

The letters confirmed that employee health-insurance premiums were unpaid, and that the employees were therefore uninsured.

“At the time of my arrival in this matter, the insurance was behind in the amount of $143,000,” Grassmueck wrote in his report. “Since there were no funds, the policy lapsed.

“I am painfully aware of the unfortunate and traumatic experience this may place some of you in,” he said. “Unfortunately, the receiver can do no more than use the tools that he has at the time of his appointment, and unfortunately, cash was not one of those tools available to me.”

The SEC suit seeks restitution to the roughly 5,000 investors of the money they spent, plus interest, and civil penalties. With some 3,500 claimants other than investors, it appears virtually certain that not all claimants will be fully satisfied from the funds that Grassmueck can locate.

Grassmueck is using the company’s website, www.znetix.com, to communicate with claimants.