UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION,
HEALTH MAINTENANCE CENTERS, INC., BAINBRIDGE HUMAN PERFORMANCE CENTERS, PLLC, ZNETIX, INC., CASCADE POINTE OF ARIZONA, LLC, CASCADE POINTE OF NEVIS, LLC, KEVIN L. LAWRENCE, DONOVAN C. CLAFLIN, CLIFFORD G. BAIRD, KIMBERLY ALEXANDER, BONNIE M. COUCH, STACY GRAY and VICKI L. LAWRENCE
COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:
1. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Sections 21(d)(3)(A), 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d)(3)(A), 78u(e) and 78aa.
2. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of thetransactions, acts, practices and courses of conduct constituting violations of the laws alleged herein occurred within the Western District of Washington and because certain of the defendants reside therein.
3. This case involves the ongoing unregistered and fraudulent offer and sale of over $90 million of unregistered securities by Kevin L. Lawrence ("Lawrence"), Donovan C. Claflin ("Claflin") and Clifford G. Baird ("Baird"). Lawrence and Claflin offered and sold about $74 million of securities of Health Maintenance Centers, Inc. ("HMC") and Znetix, Inc. ("Znetix"), both of which entities were founded and are controlled by Lawrence. Claflin, Lawrence, HMC and Znetix are collectively referred to as the "HMC Defendants." Baird offered and sold about $17 million of securities of HMC through two entities, Cascade Pointe of Arizona, LLC and Cascade Pointe of Nevis, LLC. These two entities are collectively referred to as the "Cascade LLCs." Baird and the Cascade LLCs are collectively referred to as the "Cascade Defendants."
4. The relief defendants, Stacy Gray, Vicki L. Lawrence, Bonnie M. Couch, Kimberly Alexander and Bainbridge Human Performance Centers, PLLC ("BHPC") (collectively, the "Relief Defendants"), received proceeds of the fraudulent scheme to which they have no legitimate claim.
5. The unregistered offerings by the HMC Defendants began in 1995, and since that time they have raised approximately $74 million from more than 5,000 investors throughout the country. The unregistered offerings by the Cascade Defendants began in or about May 2001, and since that time they have raised at least $17 million. The offer and sale by both the HMC Defendants and the Cascade Defendants is ongoing.
6. The HMC Defendants have made numerous material misrepresentations. The HMC Defendants falsely, intentionally and continually represented to investors that an initial public offering ("IPO") of Znetix was imminent. The HMC Defendants also misrepresented to investors that the Znetix IPO would be priced at between $3 and $60 per share and that investors could sell their shares immediately after the IPO.
7. Additionally, on or about January 19, 2001, Znetix issued a press release that included false and misleading statements regarding Znetix's current business activities. The release stated that Znetix designs, manufactures and markets certain medical equipment and creates certain medical software. The press release was false and misleading in that those were Znetix did not perform those activities when the press release was issued. Neither Znetix nor HMC has commenced any manufacturing of medical equipment or creation of any software.
8. The HMC Defendants, and each of them, have also misrepresented and omitted to disclose the use of funds. Instead of using investor funds to capitalize the Znetix IPO, as represented to the investors, the HMC Defendants used at least $16.3 million of investor funds for the personal benefit of Lawrence, Claflin, the Relief Defendants and others. Among other things, Lawrence used $2.1 million of the investor funds to purchase at least 23 cars including luxury cars, $1 million for various boats, and $1.7 million for real estate and expensive jewelry, including a $330,000 engagement ring for Stacy Gray.
9. The HMC Defendants also made additional misrepresentations to the investors after their purchase of HMC securities in order to lull investors into believing that their investments were safe and secure.
10. The HMC Defendants and the Cascade Defendants, by engaging in the above conduct, have violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) and (c). The HMC Defendants have also violated the antifraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.
11. HMC is a Washington corporation, located on Bainbridge Island, Washington. HMC purports to develop a medically integrated health fitness model for health clubs.
12. Znetix, previously known as Project X, is a Delaware corporation located on Bainbridge Island, Washington. Znetix purports to (a) market the HMC model of a combinedfitness and medical facility; (b) design, manufacture and market medical equipment; and (c) create software that analyzes a participant's performance on the fitness equipment.
13. Cascade Pointe of Arizona, LLC and Cascade Pointe of Nevis, LLC are Arizona and Nevis limited liability companies, respectively, whose sole purpose is to raise funds to acquire a majority of the common stock of HMC. Cascade Pointe of Nevis, LLC is the sole member of Cascade Pointe of Arizona, LLC.
14. Lawrence is the President of HMC and the Chairman of the Board of Znetix. Lawrence is the founder of both HMC and Znetix and controls the finances of both entities.
15. Claflin is the treasurer of HMC. His duties include maintaining bank accounts of HMC and selling HMC securities. Claflin has signatory authority over various bank accounts of HMC, BHPC and Znetix.
16. Baird is the managing director of the Cascade LLCs. Baird solicited (and continues to solicit) investors on behalf of the Cascade LLCs and caused the proceeds to be transferred to the HMC Defendants.
17. Bainbridge Human Performance Centers, PLLC ("BHPC") is a Washington professional limited liability company, located in Bainbridge Island, Washington. BHPC is nominally owned by a Znetix employee and directly controlled by Lawrence. BHPC is a conduit for receiving and disbursing investor funds. BHPC is also the employer for all HMC and Znetix employees.
18. Kimberly Alexander, also known as Kimberly Millar ("Alexander"), is the sister of Lawrence. Alexander is an employee of either Znetix or HMC and has signatory authority over several HMC and BHPC bank accounts. Alexander received at least $1 million of investor funds through direct cash payments (other than compensation) or purchases of real estate on her behalf.
19. Bonnie Couch ("Couch") is the mother of Lawrence and an ex-employee of either HMC or Znetix. Couch received nearly $200,000 of investor funds through direct cash payments (other than compensation).
20. Vicki L. Lawrence ("Vicki Lawrence") is the wife of Lawrence. Vicki Lawrence and Lawrence are presently separated and have filed for a divorce. Although Vicki Lawrence is a named employee of HMC and/or Znetix, Vicki Lawrence has never performed any services for either of the two entities. Vicki Lawrence received at least $1.5 million of investor funds through direct cash payments or purchases of cars on her behalf.
21. Stacy Gray ("Gray") is the fiancee of Lawrence and an employee of either HMC or Znetix. Gray has had signatory authority over several HMC and BHPC bank accounts. Gray received at least $500,000 of investor funds for reasons other than compensation, including a $330,000 engagement ring from Lawrence.
22. HMC and Znetix operate as a single entity and a single issuer with (a) common control of the finances of both entities by Lawrence; (b) intermingling of funds; (c) payments to employees of both companies from the same BHPC bank accounts; (c) interchanging of employees between the two entities; (d) use of the Znetix offering materials to solicit HMC investors; (e) the same general plan of financing for both entities; and (e) an intended merger of both entities.
23. From at least 1995 through the present, the HMC Defendants have raised approximately $74 million from over 5,000 investors nationwide. Of this, HMC raised approximately $64 million from about May 1995 to April 2001. This money was raised from about 5,000 accredited and non-accredited investors by Lawrence, Claflin and sales agents supervised by Lawrence and Claflin. Simultaneously, Znetix raised approximately $10 million during the period from September 2000 to March 2001.
24. In or about April 2001, the Department of Financial Institutions of the State of Washington ("DFI") issued a cease and desist order (the "C&D") against HMC, prohibiting HMC from raising further investor funds.
25. Shortly after the DFI issued its C&D, the Cascade Defendants commenced soliciting investors on behalf of HMC in an effort to evade the C&D. The Cascade Defendantshave so far raised approximately $17 million between May 2001 and December 2001. The Cascade LLCs transfer the investor proceeds to HMC, BHPC and/or Znetix in exchange for HMC shares, purportedly for later distribution to the investors in the Cascade LLC offering. The Cascade Defendants are using the Cascade LLCs to raise funds on behalf of HMC. The offerings by the Cascade LLCs are therefore integrated with the offerings of HMC and Znetix.
26. The monies raised by the Cascade Defendants and the HMC Defendants were commingled. The Cascade Defendants and the HMC Defendants also both represented that investor funds would purportedly be used to develop HMC's integrated health club model.
27. The Cascade Defendants and the HMC Defendants continue to solicit investors and raise funds through the unregistered offer and sale of securities.
28. The HMC Defendants have made, or caused to be made, the following misrepresentations to investors in connection with the offer and sale of HMC and Znetix securities:
a. That the Znetix IPO was imminent. The time frame for the IPO represented to the investors varied from one month to three years. Additionally, the investors were told that the Znetix IPO would be priced between $3 and $60 and that the investors could immediately sell their stock in or after the IPO. All of these representations were made continually and repeatedly from 1999 to the present, despite the fact that (i) no Znetix IPO has occurred; (ii) neither HMC nor Znetix had any books or records, which are required for any public company; (iii) no investment bankers have ever been retained to underwrite the IPO; (iv) no S-1 registration statement has ever been filed with the Commission for Znetix; (v) the Chief Financial Officer of Znetix specifically informed Lawrence in or about October 2000 that Znetix was not ready for an IPO; (vi) several Znetix officers claim even today that the Znetix IPO is years away; (vii) there was no reasonable basis for determining the IPO price;and (viii) there may be restrictions on the sale of certain or all of the securities of HMC and/or Znetix.
b. That Znetix was an operational entity and had already commenced (i) designing, manufacturing and marketing computerized medical equipment; and (ii) creating software that collects, analyzes and researches performance data for use by the participants and the medical professionals who care for them. Znetix made these statements in a press release, authorized by Znetix's then CEO on January 19, 2001, when the HMC Defendants were continuing to offer and sell HMC and Znetix securities to investors. Znetix posted and continues to post the statement on its Internet website located at www.znetix.com. Znetix also included the press release in a publicly available filing with the Commission. Znetix has not performed the activities listed above.
c. That investor funds would be used for manufacturing/ distributing and IPO related costs. Instead, Lawrence and Claflin knowingly and intentionally misappropriated at least $16.3 million of investor funds by making payments for the benefit of Lawrence ($8.51 million), Claflin ($2.54 million), the Relief Defendants ($3.20 million) and others ($2.13 million). From 1997 to 2001, Lawrence spent, among other things, $3.1 million in purchasing more than 23 automobiles and several boats for himself, $330,000 on an engagement ring for relief defendant Gray, and transferred $2 million to Claflin.
d. Following the sales of securities to investors, the HMC Defendants made further oral misrepresentations by (a) repeatedly reassuring investors that the Znetix IPO was imminent; (b) representing to the investors that the Znetix IPO was in the "the final stages of SEC review"; (c) touting the alleged ongoing business activities of Znetix through purported association with large investors and high profile corporate sponsorships. Because there are no significant business activities and no IPO is imminent, these representations are false.
29. All of the above representations were false and the HMC Defendants knew or were reckless in not knowing their falsity.
30. Paragraphs 1 through 29 are realleged and incorporated herein by reference. The HMC Defendants, the Cascade Defendants, and each of them, by engaging in the conduct described above, directly or indirectly, made use of means or instruments of transportation or communication in interstate commerce or of the mails, to offer to sell or to sell securities, through the use or medium of any prospectus or otherwise, and carried or caused to be carried such securities through the mails or in interstate commerce for the purpose of sale or for delivery after sale.
31. No registration statement has been filed with the Commission or has been in effect with respect to these securities. Nor were the offerings exempt from registration.
32. By reason of the foregoing, each of the HMC Defendants and the Cascade Defendants violated, and unless restrained and enjoined, will continue to violate Sections 5(a) and 5(c) of the Securities Act.
33. Paragraphs 1 through 29 are realleged and incorporated herein by reference.
34. The HMC Defendants and each of them, by engaging in the conduct described above, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by use of the mails:
a. with scienter, employed devices, schemes or artifices to defraud;
b. obtained money or property by means of untrue statements of material fact or by omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
c. engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities;
in violation of Section 17(a) of the Securities Act.
35. By reason of the foregoing, each of the defendants violated, and unless restrained and enjoined, will continue to violate Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a).
36. Paragraphs 1 through 29 are realleged and incorporated herein by reference.
37. The HMC Defendants, and each of them, with scienter, by engaging in the conduct described above, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails:
a. employed devices, schemes or artifices to defraud;
b. made untrue statements of material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
c. engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons;
in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
38. By reason of the foregoing, each of the defendants violated, and unless restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
WHEREFORE, the Commission respectfully requests that the Court:
Issue findings of fact and conclusions of law that the HMC Defendants and the Cascade Defendants committed the alleged violations;
Issue orders temporarily, preliminarily and permanently enjoining defendants HMC, Znetix, Cascade LLCs, Lawrence, Claflin and Baird, and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Sections 5(a) and 5(c) of the Securities Act;
Issue orders temporarily, preliminarily and permanently enjoining Defendants HMC, Znetix, Lawrence and Claflin, and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
Issue a temporary restraining order and a preliminary injunction (a) freezing the assets of each of the defendants; (b) prohibiting defendants HMC, Znetix, Cascade LLCs, Lawrence, Claflin and Baird from destroying documents; (c) appointing a receiver over defendants HMC, Znetix, and the Cascade LLCs; and (d) ordering accountings from all defendants;
Enter an order that each of the defendants disgorge all proceeds gained directly or indirectly from the illegal conduct of defendants HMC, Znetix, Cascade LLCs, Lawrence, Claflinand Baird, together with prejudgment interest thereon;
Enter an order directing defendants HMC, Znetix, Cascade LLCs, Lawrence, Claflin and Baird to pay civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
Grant such other and further relief as this Court may determine to be just, equitable and necessary.
|DATED: January 17, 2002||__________________________|
Alka N. Patel
Attorney for Plaintiff
Securities and Exchange Commission
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