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& Technology: Friday, August 02, 2002 Znetix founder hauled to court in stock-fraud case By Sheila Lalwani and Steve Miletich Seattle Times staff reporters The founder of a Bainbridge Island company that allegedly bilked investors out of $91 million was arrested yesterday in what federal prosecutors described as the state's largest stock-fraud case. Kevin Lawrence, 37, the former chief executive of Znetix, was led in handcuffs from a Bainbridge home to U.S. District Court in Seattle to face 64 counts of securities fraud, conspiracy, mail fraud, money laundering and wire fraud. Three other men who worked for Znetix and related companies have pleaded guilty within the past 10 days and agreed to cooperate with prosecutors. At the hearing yesterday, Lawrence pleaded not guilty and was ordered held. A detention hearing was set for Tuesday, when prosecutors will ask that he be held until trial as a flight risk. If convicted, Lawrence could face a maximum sentence of 560 years, though Assistant U.S. Attorney Jeffrey Coopersmith estimated the actual sentence would be in the "tens of years." Znetix and an affiliated company, Health Maintenance Centers (HMC), were touted as a being a medical, health and fitness company that would sell franchises in fitness clubs, as well as lucrative supporting software. Investors were told leading sports and entertainment figures had agreed to buy or license clubs, and Znetix promoted itself by sponsoring a hydroplane, advertising at Safeco Field and paying star athletes to wear clothing imprinted with the company logo. The charging documents allege that investors were told that if they bought one HMC share for $1 they would also receive four shares of Znetix. Investors also were told that Znetix was planning an initial public offering and would be worth $12 to $20 per share or more, prosecutors said. Znetix and related companies received as much as $91 million from more than 5,000 investors from 1995 until 2001, according to a civil suit filed in January by the federal Securities and Exchange Commission. But the criminal charges against Lawrence, listed in a federal grand-jury indictment handed up Tuesday, allege the loss was $72 million because that is the amount prosecutors say they were able to document. The companies sold the unregistered stock directly to investors and relied on what authorities describe as a "friends and family network" that enabled unsuspecting acquaintances to involve their loved ones. The guilty pleas from those expected to testify against Lawrence were entered by Donavon Claflin, HMC's treasurer; Kevin McCarthy, head of HMC's investor-relations department; and Clifford Baird, the manager of Cascade Pointe, a company that raised funds for Znetix. Claflin pleaded guilty Tuesday to securities fraud and conspiracy to commit securities fraud, mail fraud and unlawful sale of unregistered securities. He faces a maximum penalty of 10 years in prison. McCarthy pleaded guilty last week to mail fraud and conspiracy to commit securities, mail and wire fraud and money laundering. He also faces a maximum sentence of 10 years. Baird pleaded guilty Tuesday to conspiracy to commit securities, mail, and wire fraud and money laundering. He faces a maximum sentence of five years. McCarthy and Baird are scheduled to be sentenced Oct. 4. McCarthy is to be sentenced Nov. 1. According to court filings, the defendants spent the investors' money on lavish lifestyles. The four men were accused of squandering money on expensive clothes, boats and cars, including a Ferrari, Humvees and Mercedes trucks. Lawrence purchased a seven-carat diamond ring valued at $330,000 for his fiancée, according to the charges. At a news conference, Assistant U.S. Attorney Jeff Sullivan, joined by federal and state officials, said the case reflects a government effort to crack down on corporate dishonesty. Coopersmith, the other assistant U.S. attorney, said it was unclear if Znetix ever intended to be a legitimate business. He said the defendants "simply lied to investors to get their money." Unlike other companies recently embroiled in fraud allegations, such as Enron and WorldCom, Znetix was never a public company registered with the SEC. In June, the SEC settled parts of its case against the companies and Lawrence's ex-wife. In the meantime, investors say their hopes of getting their money back have diminished. "I'd like my money back, but that's not likely," said Kim Alonzo of Tacoma, who invested $5,000. "When we heard that (the men) involved friends and family, we thought it was such a great deal and encouraged other people." Patrick Sprague of Snoqualmie invested $35,000 through a friend. He said that because he feels cheated, he is no longer friends with the man. "Justice for me is getting my money back," he said. "It shouldn't stop with all these guys who sold stock." Sheila Lalwani: 206-464-2194 or slalwani@seattletimes.com |
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