A trustee in the bankruptcy proceedings for Palmaz Scientific Inc. last week sued its co-founders and members of its board, alleging that they looted the company before declaring bankruptcy last year.
Co-founded by coronary stent pioneer Dr. Julio Palmaz and CEO Steven Solomon in 2008 to commercialize Palmaz’s ideas, PSI raised about $40 million before pulling the plug in a year ago.
The company told its shareholders in August 2015 that Palmaz planned to resign as chairman in favor of former Kinetic Concepts Inc. CEO Cathy Burzik; serving as interim CEO, Burzik was to have helped find a replacement for Solomon and land a cash infusion backed by Targeted Technology, where she is an operating partner. Palmaz was to have remained as chief scientific officer. But the deal fell apart within days after Targeted Technology backed out. Palmaz told MassDevice.com at the time that the decision to end the deal was mutual and in the best interest of Palmaz Scientific’s shareholders. He has not since responded to requests for comment.
PSI blamed its problems on a Texas investment banker, Susan Harriman, claiming that its “ability to attract capital investment and continue its business operations has been seriously impaired by a negative campaign of false information.” Harriman allegedly lied about the company to “investors, potential business partners, the news media and even federal government authorities – resulting in substantial damage to the company and crippling its ability to maintain its ongoing operations.” But a lawsuit filed by PSI against Harriman in the U.S. District Court for Western Texas was dismissed without prejudice in 2015.
The picture painted by a new lawsuit is very different. Filed March 3 in Dallas County District Court by Milo Segner Jr., the liquidating trustee charged with recovering any legal claims, the suit alleges that Palmaz and Solomon “sold out the corporate enterprise.”
“The company was managed on a day to day basis almost exclusively by Solomon and Palmaz. Indeed, Solomon and Palmaz operated through an executive committee of the board of directors, which appears to be have been impermissibly authorized and certainly did not follow form or practice consistent with PSI’s bylaws,” Segner wrote. “Based on the official corporate minutes, it does not appear that any actions by the executive committee were ever reported to the full board of directors or communicated to the full board of directors.”
In fact, Segner alleged, PSI did not hold a single board meeting for 6 years, until the problems at the company were to big to conceal. Solomon was paid more than $3.4 million over the course of the company’s life, Segner claimed, while Palmaz walked away with the intellectual property that was PSI’s most valuable asset.
“Solomon and Palmaz also authorized for themselves extensive stock grants, which had the effect of enlarging their personal stock holdings and diluting other investors. No disinterested board of directors approved the compensation and at the time the compensation was paid and the stock was granted, PSI was massively insolvent and relying entirely upon private investor monies to fund operations,” the trustee wrote.
The company posted an operating loss of -$5.4 million in 2012, with debts of some $30 million. The numbers were worse the next year, even though PSI put up revenues of $759,000 from a supply contract – the net loss bloomed to -$9.4 million and the accumulated debt mounted to $38.9 million.
“The actions of Solomon and Palmaz are particularly egregious considering PSI’s financial position,” Segner wrote. “Remarkably, after blowing through nearly $40 million of investor funds, PSI had no products or clear path to commercialization to show for the losses, despite promising investors for years that such was on the horizon.”
Segner’s lawsuit also alleges that Palmaz, Solomon and board members Phillip Romano, Christopher Banas, Eugene Sprague and John Asel failed to ensure that crucial evidence in the bankruptcy was preserved, despite being aware that the company was likely headed to court as early as the spring of 2014.
“Defendants Palmaz, Solomon, Sprague, Romano and Asel were certainly on notice no later than August of 2015 to preserve any and all evidence related to false statements contained in investor solicitation materials. Despite the awareness of questioning investors, claims to inspect the corporate books and records, and specific evidence preservation letters, it appears that no safeguards were put in place to protect and preserve the integrity of either hard-copy documentary evidence or electronic evidence,” Segner wrote.
Segner also accused Solomon of taking computers home in late July 2015, wiping their memories and returning them to the factory default settings before returning them to the company.
“No forensic copy or mirror image of those computers was created or maintained by PSI’s directors and officers,” he wrote. “In addition, electronic mail and other electronic data from PSI appears to have been deleted from the relevant time period and not preserved or imaged, despite a general and specific awareness of potential or threatened litigation.
“Defendants’ actions constitute either intentional or negligent breaching of a duty or obligation to preserve evidence. Defendants appear to have taken no action whatsoever to preserve evidence, much less exercise reasonable care in preserving and maintaining evidence relevant and material to investor inquiries and threats. 126. The Trustee demands a jury instruction regarding spoliation of evidence in his favor,” Segner wrote.
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