This morning, Kevin L. Lawrence of Bainbridge Island was sentenced to 20 years in prison and ordered to pay over $91 million in restitution for his participation in what is being called the largest stock fraud case in Washington State’s history. Helen Howell, Director of the Department of Financial Institutions (DFI), congratulated her staff for helping stop Znetix/Health Maintenance Centers (Znetix/HMC) from taking advantage of more consumers. During the three-year investigation, the Department spent an estimated 12,000 hours uncovering the scheme which involved over 5,000 investors from 36 states and several foreign countries. DFI worked with federal prosecutors to discover a maze of domestic and offshore accounts used by Lawrence to conceal investor funds totaling close to $100 million.
“I am proud of the deep level of commitment our investigators have shown in this case. The DFI team uncovered key evidence to help our federal partners prosecute the players in this case,” said Director Howell. “Their thorough investigative work exemplifies the dedication DFI has to protecting consumers in Washington State.”
Kevin L. Lawrence is one of seven defendants who pleaded guilty to criminal charges in connection with the case. Earlier this summer, Lawrence pleaded guilty to three felony criminal offenses: (1) Conspiracy to Commit Securities Fraud, Wire Fraud, Mail Fraud, Unlawful Sale of Unregistered Securities, Money Laundering, and Engaging in Monetary Transactions with Proceeds of Unlawful Activity; (2) Securities Fraud; and (3) Wire Fraud in a plea agreement filed in the Tacoma U.S. District Court. Five other defendants have been charged for their involvement in Lawrence’s fraudulent scheme and are awaiting trial.
The enforcement team traced hundreds of thousands of bank transactions. A total of 362 subpoenas were issued to banks for records on over 570 bank accounts. Nearly 600,000 checks, deposit items and wire transfers were reviewed and entered into a Securities Division database. That information helped authorities piece together the story of how Lawrence and his co-conspirators diverted millions of dollars to their personal use and benefit.
DFI committed a significant portion of its enforcement staff to the three-year investigation. Nine employees, of a total staff of 45 worked on the Znetix/HMC administrative and criminal investigations. DFI worked with the Seattle offices of the U.S. Attorney, Federal Bureau of Investigation and Internal Revenue Service and the Los Angeles Office of the Securities & Exchange Commission to bring the seven-year old scam to a halt.
In the wake of the Znetix stock fraud investigation, the Washington State Legislature voted to toughen penalties against those who commit securities fraud. Substitute House Bill 1219 will assist law enforcement officers in prosecuting those who violate securities fraud. It will also increase penalties for those who violate securities laws and expand the statute of limitations for charging those who break the law.
Director Howell commented that the sentencing of Lawrence marks a milestone in the Department’s ongoing investigation and encouraged consumers to remain vigilant in the future.
“We encourage consumers to take the steps necessary to protect themselves against offerings that are potentially fraudulent,” said Howell. “Con artists use the ‘get-rich-quick’ promotions that are monopolizing headlines to get into wallets of investors. The public must stay alert and make sure that financial products are legitimate before they invest their life savings.”
Background
In October 2000, evidence regarding possible violations of the State’s requirement for the registration of securities came to light. DFI began a comprehensive investigation of Lawrence and two of his companies, Health Maintenance Centers, Inc. and Znetix, Inc. and issued a subpoena for records. At that time, Lawrence was operating a health club on Bainbridge Island. The club touted itself as an industry innovator that integrated fitness and health care into one business model -- consumers could do fitness workouts and obtain health care within the same facility.
The companies were also offering to design, manufacture, and market fitness equipment, in addition to creating software to analyze the club member’s physical performance.
The investigation led DFI to issue a cease and desist order in April 2001 against Lawrence and Health Maintenance Centers, Inc. (HMC). The order prohibited HMC from offering and selling stock. It alleged that Lawrence and his business partner had failed to comply with the state securities registration laws and violated the securities anti-fraud laws by misleading investors. DFI alleged that the two claimed that each share of HMC stock would be exchanged for four shares of Znetix stock and that Znetix would be completing an Initial Public Offering (IPO) within several months. In addition, Lawrence and HMC failed to disclose financial information about the company or provide materials to the investors about how their money would be used.
Persistence played a role in unraveling the scheme. The perpetrators used a maze of domestic and offshore entities and accounts to conceal the sources and uses of investor funds. One break came during the execution of a search warrant. A DFI investigator discovered a pin number on a storage facility business card. The pin number eventually led to the discovery of dozens of audiotapes of Kevin Lawrence discussing strategies and numerous offshore accounts used by certain defendants to conceal funds.
Lawrence, who graduated from Bainbridge High School 1984, was known as Kevin Millar at the time. In the 1990s, he filed for personal bankruptcy and worked briefly for a brokerage firm. After converting a Bainbridge Island bowling alley into a fitness gym, Lawrence began an ambitious marketing plan that attracted as many as 2,400 Washington investors who believed that the company might be the next IPO miracle. He presented investors with the facade of a financially successful facility. He equipped the Bainbridge Island gym with modern exercise equipment, computers and hired chiropractors, masseuses and a nutritionist to work in the facility. Lawrence misrepresented his credentials and experience, as well. He led some investors to believe Morgan Stanley hired him in connection with its overseas investment banking activities.
Lawrence and his representatives were able to convince investors to part with their money by telling them that Znetix would go public and be traded on NASDAQ at much higher prices. Morgan Stanley was represented to be the underwriter for the Znetix IPO. Investors were told that a $5,000 minimum investment could grow to $1,000,000 in a few months time. One investor was told that a $400,000 investment in June 2000 would be worth $19.2 million to $32 million by the end of that year.
Lawrence furthered the illusion of success or progress by promoting Znetix through a myriad of marketing schemes such as sponsorships of athletes, teams or events. Lawrence sponsored a Znetix sign at Safeco Field and Husky Stadium; Znetix sponsored a hydroplane boat; a ocean racing boat; a motorcycle team, auto racing team; the Seattle to Portland bike ride; a cyclist; Mariner senior discount and merchandise promotions such as bat night; and hosted a lavish New Year’s Eve party at the Four Season’s Hotel in Los Angeles.
Lawrence used apparent associations with athletic celebrities to give credence to the notion that Znetix had a viable fitness and health care business model. A number of athletes were represented as directors of Znetix and Los Angeles Laker basketball star Shaquille O’Neal wore a Znetix cap to the 2001 NBA championship celebration. Some investors were led to believe that the celebrities/athletes were also financial backers or prospective franchise owners of the company’ concept health and fitness centers.
What made Lawrence and his co-conspirators so successful at raising money? DFI investigators learned that part of the secret to his success was how the money was raised. Many investors were told that it was a “friends and family” offering, giving the illusion that one had an inside connection to cash in on the deal. Much of the money was raised by word of mouth and took advantage of the natural bonds of trust that ran through family, work and religious group affiliations. A number of the victims were members of multi-level marketing organizations and were solicited by fellow members.
The reality was that Morgan Stanley never hired Lawrence to assist in foreign investment banking activities. There was no evidence that he could make the HMC fitness/health care operation pay itself. No adequate financial controls were put in place to monitor financial results. Neither HMC nor Znetix had audited financial statements or investment bankers willing to take them public. Neither company ever filed tax returns with the IRS. The celebrities/athletes were not providing substantial financial support to the company.
Much of the money from investors was spent to keep the illusion alive, such as employee payroll, office space, travel, entertainment, sponsorships, purchases of businesses in the healthcare field, and contracts to develop or purchase software and equipment. Lawrence spent $657,000 on the New Years Eve party at the Los Angeles Four Seasons. HMC paid $350,000 per year for the sign at Safeco Field. Lawrence chartered a private jet so that he and his girlfriend could attend events in California and Las Vegas. Employees were flown to Las Vegas for company functions. Lawrence preferred a suite at the Four Seasons for his Las Angeles trips.
Lawrence used investors’ money to purchase a number of personal items. He owned several homes on Bainbridge Island, real-estate property on the Olympic Peninsula, a home and property in Hawaii. Among the 47 cars, 20 personal watercraft, jewelry and art that he owned, there were Rolex watches, a Mercedes, five Hummers, four Ferraris, two DeThomaso Panteras, three Dodge Vipers, two Cadillac Escalades, a Lamborghini Diablo, a 22-foot Bombardier speedboat, a 7.08-carat diamond ring for his girlfriend/fiancée valued at more than $300,000, a 21-carat diamond bracelet, a platinum Brequet watch valued at $150,000 and a Ducati motorcycle. On Aug. 18, 2000, Lawrence bought a $200,000 SeaMaster boat with a HMC check. About two weeks later, he bought a $135,755 Mercedes Brabus Gelaendewagen and a $149,000 Catamaran. DFI investigators assisted in a search warrant on Lawrence’s principal home on Bainbridge Island, where a Samurai sword with an estimated value of $200,000 was recovered.
The impact on the victims has been tremendous. Although many have lost modest amounts of money, some victims have lost substantially all of their savings. The victims are not limited to investors. A number of vendors and recipients of Znetix sponsorships made financial commitments that were done in reliance on Znetix fulfilling its commitment to them for funding. In February 2002, the SEC filed a civil action in Seattle U.S. District Court where a receiver was appointed and is currently in the process of determining what, if any, financial recovery is possible for investors.