How Znetix investors got pulled in
Pockrus is a volunteer minister who lives in an Auburn trailer park. A friend from his church, Darrell Gray, was telling him about a Bainbridge Island company: Health Maintenance Centers (HMC).
The privately owned company had opened a gym on the island a ferry ride away. The plan was to provide members with one-stop medical and fitness advice, with an eye toward selling health franchises in Washington and, eventually, around the country. And, sooner rather than later, the company was going to offer its shares to every investor by going public.
An HMC employee — who represented himself as a Christian — met Pockrus and Gray at a Dairy Queen in Seattle. He claimed investors could make as much as 240 times their original investment when the company went public. The trio prayed at the restaurant and Pockrus, believing a fellow churchgoer wouldn't steer him wrong, plunked down $68,000. Gray emptied his savings account and anted up an additional $20,000.
But, as is almost always the case in these sorts of things, the devil was in the details.
Like more than 5,000 others who invested in HMC, which later came to be known as Znetix, Pockrus and Gray fell victim to what prosecutors allege is the largest fraud case in Washington history. The company that promised millions has fallen into bankruptcy and spawned lawsuits, recriminations and a massive federal criminal case targeting its founder and chief executive, Kevin Lawrence. The feds say much of the $91 million that investors put into the company went to cars, houses, jewelry and works of art.
Lawrence sits in jail, awaiting trial on a 64-count indictment alleging wire fraud, mail fraud, securities fraud and conspiracy. Three others who played significant roles in the company have already pleaded guilty to similar crimes.
Pockrus, meantime, still lives in his trailer and is facing the prospect of having to find a job in retirement. His dream of an expanded ministry is dashed — he worries now simply about making his meager ends meet.
"They should go and pay the price for what they did," Pockrus said. "Somebody is going to have to make an example of them."
The deal
In the dot-com heyday of the '90s, it really was possible to get rich quick. Public offerings for companies started by feisty young entrepreneurs with little business experience — and even sketchier business plans — were making fortunes almost overnight for early investors.
Meantime, age and gravity were taking their toll on the baby boomer generation. Working out and staying healthy were concerns that had transformed themselves into a major new market force.
|
First came HMC. In addition to the gym, HMC was going to design, manufacture and market medical equipment and create software that analyzed an exerciser's performance.
Lawrence created Znetix to market the HMC brand. He also created an ambitious marketing plan. The company paid for a prominent billboard at Safeco Field and recruited and paid top-name athletes such as Shaquille O'Neal of the Los Angeles Lakers for endorsements. O'Neal appeared on television after the Lakers won their third NBA championship sporting a Znetix hat.
"They talked about the basketball stars and the money they paid for advertising,'' said Pockrus. "They were using the big names from back East even. Since people were putting in everything they got, I thought it must be legitimate. They said it was going to (go public) anytime, anytime, anytime."
According to court filings, investors were told to purchase HMC shares, which would then be converted into Znetix after the initial public offering. According to a lawsuit filed by the Securities and Exchange Commission, investors were told that once the two companies merged, they could cash out and receive as much as 240 times their initial investment.
The aggressive marketing plan located investors through telemarketing and then encouraged them to recruit friends and family to let them in on what was called a once-in-a-lifetime opportunity.
Jody Strauss, an Arizona resident who heard about the deal through friends, invested $100,000. She was so excited about the prospect that she helped her mother invest $20,000.
"We saw the Znetix signs and felt reassured. Whenever we talked to people, everything was moving in the right direction," Strauss said.
Court papers, prosecutors and SEC investigators say investors were wooed by sales representatives wearing expensive suits and driving exotic cars. They passed out company information disguised to look like official SEC prospectus forms. They were confident, glib and high-pressure. They met clients in restaurants and shopping malls, arriving in Ferrais and Hummers.
The company's 30-page brochure stated that Lawrence was a graduate of the University of California with degrees in business, accounting and economics. He claimed Morgan Stanley selected him to facilitate "numerous investment-banking engagements in mainland Japan."
Dale Alonzo of Tacoma looked over the prospectus then emptied his savings account to buy 5,000 shares for $1 each. He was promised a return of $45 to $80 a share when the company went public.
"You are like the little guy who dreamed you'd win the Lotto. I thought, here's my chance," said Alonzo. He was told the company would go public within months of his investment.
It never did.
The reality
SEC attorney Nicholas Morgan says that for HMC and Znetix to go public "would have been impossible given their lack of financial resources along with a host of reasons."
Znetix didn't have an accounting firm, an investment bank or audited financial statements — all of which a company needs before it can even try to go public. HMC and Znetix were never legally registered to do business in the state and had never registered with the SEC.
Authorities say Lawrence never worked for Morgan Stanley. He did graduate from Bainbridge High School in 1984 but whether he attended college could not be verified.
There was no software being developed. In fact, authorities say the sum total of the business was the Bainbridge gym — a converted bowling alley with a few pieces of fitness equipment.
Court documents allege Znetix officials funneled investors' money into more than two dozen accounts, some of them offshore. Records also show company executives spent millions on fancy cars, boats and jewelry. Federal agents seized more than $800,000 in boats, cars and other luxury items from Lawrence, including a samurai sword valued at $200,000 and a 20-carat diamond bracelet found in a box in his unlocked garage.
In all, the SEC alleges Lawrence used more than $14 million in investor money to support his lifestyle. Millions more went to his family, friends and ex-fiancé.
The deal unravels
On April 9, 2001, the securities division of the Washington Department of Financial Institutions ordered Lawrence and HMC to cease selling shares in the company, alleging security-law violations. In the meantime, both state and federal agencies, including the FBI, began investigating the company and its officers.
In response, according to court documents, Lawrence formed another company, Cascade Pointe, which was supposed to address the shortcomings of HMC and Znetix.
Last Jan. 23, SEC attorneys went to court to shut down Znetix and sought an injunction to prevent Lawrence from selling unregistered securities. Simultaneously, seven search warrants were executed by agencies conducting criminal investigations into the companies.
The SEC also wants Lawrence to pay back the money he used for personal gain, and pay hefty fines.
In the criminal arena, federal prosecutors have obtained indictments against Lawrence and several company executives. Three have already pleaded guilty and have agreed to cooperate in the prosecution of Lawrence in exchange for recommendations of leniency when they are sentenced. They are scheduled to be sentenced on Jan. 17. Lawrence faces dozens of years in prison if convicted. His October trial date has been pushed back to March.
That would prove equivocal justice for the thousands of Znetix investors, many of whom will likely see only pennies on the dollar once bankruptcy proceedings are finalized. Much of their money was frittered away, according to prosecutors, on luxuries that can not be recovered.
A three-day auction in August brought in nearly $1.8 million. Among the dozens of vehicles were ATVs and a trailer home. A Dale Chihuly glass bowl went for $2,000; a seven-carat diamond ring went for $152,000.
What's left
Znetix has left a trail of damaged relationships. Some are healing, some never will.
Patrick Sprague of Snoqualmie has gone to Superior Court to get his money back and to punish the people who sold him HMC stock.
In February 2000, a friend gave Sprague two colorful binders about HMC, neither of which disclosed HMC financial information. Sprauge put in $35,000. He brought his dad, Thomas, into the deal for $25,000 more.
Sprauge, who had hoped to use the profits to start his own business, sued the company and his ex-friend for brokering the deal.
"I want my money back, and I would like to see consequences for anyone who served as an agent selling the stock," Sprague said.
Some investors acknowledge they saw warning signs but pushed ahead because they saw an opportunity for the kinds of success they heard about every day. In retrospect, they wish they had investigated the company a bit more before reaching for their wallets.
"I don't trust that sort of thing anymore," Alonzo said. "Especially, things that sound too good to be true. I'm married with four kids, and someday, I will tell (my kids). It's a little embarrassing to say you lost your money. I would tell them to be very cautious and to get the proper papers."
Investors aren't the only ones scarred by the collapse of Znetix and HMC. In a filing in May in bankruptcy court, Kevin Lawrence's mother, Bonnie Couch, sought to retain use of one of the two Cadillacs her son had purchased for her and her husband.
Couch said she had quit her job with the Port of Seattle to become the human-resources manager for HMC.
"I left a secure position with significant retirement benefits in order to work for my son's business," she said. She received no pay for several months, and the last check she got bounced.
Lawrence had promised her husband, who also retired from his job with the city, a boat and funding for his "dream of starting a marine service business." Last spring, the boat was seized by federal agents, she said, and the business is defunct.
"This has resulted in significant financial strain," Couch told the court.
Pockrus knows something about financial strain, too.
"As old as I am, I'm still naive enough to go out and go back to work for a while," he said. "I have to build something back up. I'm too old for most people to think of hiring me."
Gray and Pockrus remain friends. Gray is going to school to be a trucker.
"I've scratched it up as a bad decision," Gray said. "No more investing. No more stock market. No more ventures. No more risks."