Deal allots money for Znetix investors

Thousands of investors who lost money in the Znetix scam likely will get a small part of it back by the middle of the year, according to court papers filed by the court-appointed receiver in the massive stock-fraud case.

The most recent settlement: A deal the receiver, Michael Grassmueck, struck for 40 former officers and directors of Znetix to pay $8.4 million into the restitution fund.

Assuming the deal is approved by U.S. District Judge Marsha Pechman at a hearing scheduled for Feb. 11, that money will be combined with the $12.84 million now in the receiver's accounts and other funds he is seeking from former Znetix business partners.

Grassmueck is scheduled to hold a news conference at 10 a.m. today at the new federal courthouse building to provide an update on his progress in getting some of investors' money back.

In a statement on his official Web site, www.znetix.com, Grassmueck said that as of Nov. 1 more than 4,750 claims, exceeding $130 million, had been filed. After throwing out fraudulent, duplicative or otherwise invalid claims, the total dollar figure claimed could fall to between $96 million and $101 million.

But barring an unexpectedly large amount of restitution payments from a dozen convicted former Znetix executives, those claims will be settled for pennies on the dollar.

Bainbridge Island-based Znetix and its affiliated companies were the creations of Kevin Lawrence, now serving a 20-year sentence at a federal prison in Ohio. Lawrence pitched Znetix as the franchiser of a unique kind of medically based fitness center; he and his associates told investors that major sports stars had agreed to buy licenses and that a lucrative initial public offering was imminent.

In reality, Lawrence and other Znetix figures spent most of the money they raised on themselves — buying everything from Hawaiian real estate to Rolex watches. The scam collapsed in early 2002, after the Securities and Exchange Commission sued Znetix and state regulators moved to freeze the company's assets.

Substantially all of those assets have been liquidated, according to Grassmueck's most recent semiannual report to the court (though one Rolex remains available for sale).

Those asset sales have raised $6.9 million; a settlement last year with Ogden Murphy & Wallace, Znetix's former law firm, netted another $13.3 million. Overall, the receivership has grossed some $21 million.

But after payments to secured creditors, legal fees, paychecks for Grassmueck and the lawyers and accountants working for him, taxes and other expenses, the receivership had total assets of $12.84 million as of Nov. 30.

That will be augmented by the $8.4 million the group of 40 former directors and officers — including former basketball great Kareem Abdul-Jabbar, former baseball pitcher Vida Blue and boxer Laila Ali — and their insurers have agreed to pay. Details of the settlement are sealed.

Grassmueck is pursuing a $3.3 million claim against members of a development partnership stemming from the 2000 sale of the partnership to Znetix. That case, filed in September, is pending in U.S. District Court in Seattle.

Four former Znetix insiders remain to be sentenced. Stock salesmen Larry Beaman, Michael Culp and Harvey Kuiken are scheduled to be sentenced March 4; they were convicted of fraud charges in May. Alfonso Lacson Jr., a stock salesman who pleaded guilty to securities fraud a year ago, is set to be sentenced April 18.

The three men's sentencings had been postponed because of legal uncertainties stemming from the U.S. Supreme Court's Blakely ruling last summer, said Emily Langlie, spokeswoman for the U.S. Attorney's Office in Seattle. The Blakely decision said juries, rather than judges alone, must decide whether the facts of a case warrant sentences beyond the standard range; two other Znetix defendants, Clifford Baird and Kevin McCarthy, are appealing their sentences based on Blakely, Langlie said.

A pair of Supreme Court opinions earlier this month clarified some of the issues raised by Blakely, she said, allowing the sentencing of Beaman, Culp and Kuiken to proceed.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com