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| Business & Technology: Friday, August 30, 2002 Lawyers sued in alleged stock-fraud scheme By Sheila Lalwani Seattle Times staff reporter A Seattle law firm and three of its attorneys are being sued for $101.5 million in a legal malpractice suit in connection with what is allegedly the state's largest stock-fraud scheme. The law firm, Ogden Murphy Wallace, represented Health Maintenance Centers and a related company, Znetix, which allegedly bilked more than 5,000 investors of $91 million. Michael Grassmueck, the court-appointed receiver who is responsible for recovering items spent with investor and creditor funds, is accusing the firm of negligence, breach of fiduciary duty and disgorgement of fees. The suit also names attorneys Franklin Dennis, John O'Donnell and James Vandeberg, who provided counsel to Health Maintenance Centers and Kevin Lawrence, the founder of Znetix, a Bainbridge Island company. Attorneys representing the defendants have until next Friday to submit their formal responses to the suit filed in federal court in Seattle. But in interviews yesterday, the defendants downplayed the lawsuit. "We dispute the allegations in the complaint and don't think it's accurate," said attorney Timothy Leyh, who is representing O'Donnell. "This is all very, very preliminary." Karen Sutherland, assistant managing member of Ogden Murphy Wallace, said the law firm stands behind its attorneys. "We are confident their conduct has met the highest legal and ethical standards," she said. Filing such lawsuits is not unusual, according to legal experts, but they cannot be considered by the court as frivolous. Allegations include that the defendants knew that HMC had been selling unregistered securities to the public in ways that were false and misleading, and that the attorneys continued to represent Lawrence and his companies until HMC and Znetix were placed into receivership Feb. 15. Attorneys for Ogden Murphy Wallace began representing Lawrence, HMC and Znetix in 2000 after the Securities Division of the state Department of Financial Institutions issued a subpoena to Lawrence and HMC in connection with the securities-fraud investigation. The lawyers allegedly received more than $1.5 million from HMC funds for their services, according to the lawsuit. Znetix and Health Maintenance Centers thrived during the mid-to-late 1990s and were presented to investors as a medical health-fitness company that would sell franchises in fitness clubs. Investors were also told that Znetix planned to make an initial public offering that would return anywhere from $12 to $20 per share or more for shares purchased for $1. Authorities say that investor money was misspent on personal items including designer cars, boats and jewelry. With its expensive and high-profile advertising, Znetix appeared successful. Founder Lawrence is currently in detention facing 64 counts of securities fraud, conspiracy, mail fraud, money laundering and wire fraud. Combined, they carry a maximum punishment of 560 years in prison. He has pleaded not guilty. His trial is set for later this year, and according to the U.S. Attorney's Office, the lawsuit against the law firm won't affect his trial. Sheila Lalwani: 206-464-2194 or slalwani@seattletimes.com |
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