Lawton is sentenced to 70 months

He tried the stock market defense. He didn't succeed.

Former Wayzata hedge fund manager John Lawton's claim that a nearly unprecedented crash on Wall Street two years ago, not fraud, caused his investors to lose $8.6 million, failed to sway a skeptical U.S. District Judge Paul Magnuson, who sentenced Lawton to 70 months in prison Wednesday.

With tearful family and friends in the audience and angry investors watching as well, Lawton faced the spectators and apologized.

"I'm sorry from the bottom of my heart," he said after turning his back to the judge and looking directly at the nearly full gallery. "The money did not go in my pocket. ... I'm sorry the losses were more than the gains."

The sentence culminated a yearlong effort by Lawton, 35, to undo a voluntary guilty plea to charges of fraud and making a false statement entered in 2009 and to prove his innocence with the stock market defense.

But federal prosecutors and Magnuson weren't buying it.

"He provided false information to investors on a monthly basis," said assistant U.S. Attorney Nicole Engisch. "He did not have cash in the fund that he said he had. ... His acceptance of responsibility is tepid at best."

Some of those investors were in court Wednesday to make their pain known to Magnuson and Lawton. Several asked for the longest sentence possible for the onetime Robbinsdale resident.

"The majority of my life savings were lost," said Ellen Peterson. "I'm 65. I no longer can consider retiring. Prosecute him to the fullest."

Another investor, Minnesota hockey great Joe Dziedzic, said he lost $200,000 with Lawton.

"He lied, cheated and scammed us out of a lot of money," Dziedzic said.

But Susan Stein-Fern, who described herself as a certified public accountant, said she would invest again with Lawton.

In court filings, Lawton and his attorney, Douglas Altman, asserted that actual losses were far less than those claimed by the government and that nearly $4.6 million in funds was withdrawn by investors.

Lawton, who eventually moved his Wayzata operation to San Francisco, also has stated that a relationship with a California firm called Capitol Solutions Monthly Income Fund was detrimental to his business. Four principals in that firm, including Todd Duckson of Prior Lake, have been charged by the Securities and Exchange Commission with defrauding investors in a real estate fund that had no significant income.

With time off for good behavior and successful completion of a prison-based substance-abuse program, Lawton could be eligible for parole in slightly under four years. Magnuson recommended that Lawton be sent to the federal prison camp in Duluth to do his time.

"Yes, there were losses in the market," Magnuson told Lawton just before imposing the sentence. "But the reality is just there. You didn't tell the truth and when you lied, you stole. It's as simple as that."