Post on 23-May-2020
CAUSE NO. DC-15-11994
MILDRED V. EHRENBERG, et al. Plaintiffs,
V.
JULIO P A L M A Z , M.D. and STEVE SOLOMON,
Defendants,
§ § § § §
IN T H E DISTRICT COURT
DALLAS COUNTY, TEXAS
162nd JUDICIAL DISTRICT
MILO H . SEGNER, JR., as Trustee of of the Palmaz Scientific Litigation Trust and Assignee
Plaintiff-Intervenor,
V.
JULIO P A L M A Z , STEVE SOLOMON, PHILLIP ROMANO, E U G E N E SPRAGUE, CHRISTOPHER BANAS, and JOHN ASEL,
Defendants. § §
PLAINTIFF-INTERVENOR'S ORIGINAL PETITION AND P L E A IN INTERVENTION
C O M E S N O W , M i l o H . Segner, Jr., Liquidating Trustee of the Palmaz Scientific Litigation
Trust and through his counsel would respectfully show as follows:
L SUMMARY
1. Palmaz Scientific, Inc. ("PSI") was a biomedical technology start-up company with
a portfolio of intellectual property worth millions of dollars. Unfortunately, PSI was dominated
and controlled by a group of insiders who sold out the corporate enterprise. Notably, the PSI Board
of Directors breached their fiduciary duties by, among other things:
ORIGINAL PETITION A N D P L E A IN INTERVENTION - Page 1
Tonya Pointer
FILEDDALLAS COUNTY
3/3/2017 3:17:27 PMFELICIA PITRE
DISTRICT CLERK
• Holding zero (-0-) meetings of the ful l Board of Directors from June 20, 2008 through August 27, 2014;
• Abdicating their fiduciary responsibilities to an Executive Committee;
• Permitting excessive compensation to inside directors;
• Concealing the excessive compensation and covermg up the reason for the CEO's departure;
• Utterly failing to oversee and monitor the accounting and financial function by choosing not to use intemal accounting controls, policies and procedures to ensure Board visibility into the financial condition ofthe company; and
• Choosing to grant security interests in all of the company's assets (including its most valuable asset - its intellectual property) to company insiders and their family mernbers.
2. From the very beginning and throughout the company's existence, PSI's directors
and officers chose not to put into place a systematic business plan or operational strategy to
commercialize its existing intellectual portfolio. PSI's directors and officers also chose not to put
into place an oversight system to fully reveal the fmancial position of the company at any given
time. Instead, the Board of Directors chose to allow PSI's insiders to systematically enrich
themselves with lucrative executive compensation, treated private money raises as operational
cash flow, and when it finally became clear that PSI's stakeholders were likely irretrievably
underwater, stripped the company of its single most valuable asset - its intellectual property
portfolio.
3. PSI's directors and officers breached their fiduciary duties of care and loyalty at
virtually every step of the way. Most of PSI's corporate decisions were undertaken by either an
entirely interested and conflicted board of directors, or were made by a board that was so
thoroughly dominated and controlled by the controlling shareholders ofthe company as to render
any decision essentially an interested one. Any allegedly "outside" or "disinterested" director
ORIGnSTAL PETITION A N D PLEA IN INTERVENTION - Page 2
abdicated ttieir obligations to make informed decisions from the very beginning of PSI and
demonstrated systematic ignorance of core corporate governance principles.
4. PSI's shareholders and creditors deserved more than wanton disregard for
principles of good corporate governance. The utter failure in board oversight and insider self-
dealing that occurred resulted in the loss of over $30 million.
II. PARTIES
5. Mi lo H . Segner, Jr. is the duly appointed liquidating trustee (the "Trustee") ofthe
Palmaz Scientific Litigation Trust (the "Trusf) , which was created as part of a bankruptcy plan of
reorganization confirmed by the United States District Court for the Western District ofTexas in
August of 2016. The Trustee sues in multiple capacities in this case. First, as the estate
representative pursuant to Section 1123(b)(3)(B) of the United States Bankruptcy Code, which
vests standing and authority in him as the post-confirmation liquidating trustee of a Bankruptcy
Court-approved private litigation trust to pursue any and all claims and causes of action that
belonged to PSI and its affiliates before final confirmation ofthe Second Amended Joint Plan of
Reorganization, as Modified. Second, as the assignee of certain assignments granted to him for
the pursuit of individual claims or causes of action that belonged to certain individual investors
arising out o fo r related to the issuance, sale or purchase of stock in PSI. Attached as Exhibit " A "
is a list of assigning investors whose claims are being pursued by and through assignment and in
the Trustee's capacity as assignee of personal causes of action.
6. Julio Palmaz is a founder, fonner Chief Science Officer, and former Chairman of
the Board of Directors of PSI. Palmaz is an individual resident of Califomia and Texas, who may
be served with process at 4031 Hagen Road, Napa, Califomia 945 5 8, or wherever he may be found.
As a member of the Board of Directors and largest shareholder of PSI - a Dallas, Texas company
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 3
- Palmaz has purposefully availed himself ofthe laws of the State of Texas and has both general
and specific contacts sufficient to support personal jurisdiction. Palmaz has already appeared and
answered in the underlying lawsuit.
7. Steve Solomon is a founder, former Chief Executive Officer and member of the
Board of Directors of PSI. He is a resident of the State ofTexas and may be served with process
at 4405 Belclaire Avenue, Dallas, Texas 75205, or wherever he may be found. He has purposefully
availed himself of the laws of the State of Texas, and has both general and specific contacts
sufficient to support personal jurisdiction. Solomon has already appeared and answered in the
underlying lawsuit.
8. Phillip Romano is a founder and former member ofthe Board of Directors of PSI.
He is a resident ofthe State ofTexas. He may be served with process at 4838 Shadywood Lane,
Dallas, Texas 75209, or wherever he may be found. He has purposefully availed himself of the
laws of the State ofTexas, and has both general and specific contacts sufficient to support personal
jurisdiction.
9. Christopher Banas is a founder, former Chief Operating Officer and former member
of the Board of Directors of PSI. He is a resident of the State of Texas. He may be served with
process at 3463 Magic Drive, San Antonio, Texas 78229, or wherever he may be found. He has
purposefully availed himself of the laws ofthe State ofTexas, and has both general and specific
contacts sufficient to support personal jurisdiction.
10. Eugene Sprague is a former member of the Board of Directors of PSI. He is a
resident of the State ofTexas. He may be served with process at 14722 Iron Horse Way, Helotes,
Texas 78023, or wherever he may be found. He has purposefully availed himself of the laws of
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 4
the State of Texas, and has both general and specific contacts sufficient to support personal
jurisdiction.
11. John Asel is a former officer and member of the Board of Directors of PSI. He is
a resident of the State ofTexas. He may be served with process at 11602 Shotgun Way, Helotes,
Texas 78023, or wherever he may be found.
HI. JURISDICTION AND V E N U E
12. Venue is proper in this county pursuant to Texas C iv i l Practice & Remedies Code
§ 15.002(a)(1) because all or a substantial part ofthe events or omissions giving rise to the claim
occurred in this county.
13. The Court has jurisdiction in this matter pursuant to Article V , Section 8, ofthe
Texas Constitution and Texas Govemment Code § 24.008.
IV. DISCOVERY
14. Plaintiffs intend that discovery be conducted under Level 3 and affirmatively plead
that they seek damages in excess of $10,000,000. Damages sought are over $1,000,000 in
monetary relief and are within the jurisdictional limits ofthis Court. See Tex. R. Civ. P. 47(c)(4).
V. BASIS FOR INTERVENTION
15. Plaintiff-Intervenor has a justifiable interest in a lawsuit when his interest w i l l be
affected by the litigation. The Trastee has an interest in this suit because he has a right to control
any recovery made from director and officer liability insurance that may cover or defend those
claims. The Trustee also has a right to recover against the same individuals (Palmaz and Solomon)
and could have brought all or part of the same suit in his own name as the assignee of individual
investors. The Tmstee has an interest in pursuing the same parties, and others, for claims relating
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 5
to acts and omissions arising out oftlie same nucleus of operative facts and any fmding here could
adversely affect his right to recovery.
VI. F A C T U A L BACKGROUND
A. Palmaz Scientific, Inc. is formed in 2008 as a successor and owner of ABPS, Venture One and ABPS Management.
16. In 2000, Advanced Bio Prosthetic Surfaces, Ltd. ("ABPS") and A B P S VenUire
One, Ltd. ("Venture One") were established to explore metal surface technologies for medical
implant devices. A B P S Management, L L C ("ABPS Managemenf) was the general partner of
A B P S . Dr. Julio Palmaz ("Palmaz") and Philip Romano ("Romano") were owners and partners
in these limited partnerships.
17. In 2003, A B P S and Venture One entered into a licensing agreement with Cordis
Corporation, which granted Cordis an exclusive license to commercially develop certain A B P S
and Venture One technology. The licensing agreement provided that the license would revert to
ABPS and Venture One i f the technology was not commercialized within a certain time period.
ABPS and Venture One were unable to commerciahze the technology successfully and in May
2008, technology and licenses reverted back to A B P S and Venture One.
18. PSI was formed to become a successor entity to the partnerships that previously
held contractual licensing agreements with Cordis Corporation. On February 8, 2008, PSI was
created and Steven B . Solomon ("Solomon") was appointed as President, Treasurer and Secretary
of the company. This action was taken by unanimous written consent of the only member ofthe
PSI board of directors at the time - Solomon. B y the same procedure, Solomon appointed himself
Chief Executive Officer of PSI on February 8, 2008. At the time, PSI was nothing but a shell
entity with no assets and no liabilities.
ORIGINAL PETITION AND PLEA IN EMTERVENTION - Page 6
19. In the summer of 2008, the individual limited partners of A B P S and the sole
member of A B P S ' s general partner exchanged their partnership and membership interests in A B P S
for shares of PSI common stock. The transfer made A B P S and A B P S Management into wholly
owned subsidiaries of PSI and allegedly allowed PSI to raise capital to commercialize medical
device technology. Venture One became an 80% subsidiary of PSI, but was a dormant company
with no assets or operations.
20. Upon the completion ofthe transfer ofthe partnership interests to PSI, the size of
the PSI board of directors was increased from one to four directors. Dr. Julio Palmaz was
appointed as Chairman ofthe Board and Chief Scientist of PSI. Christopher Banas ("Banas") was
appointed as the acting Chief Operating Officer and a board member. Philip J. Romano
("Romano") was also appointed as a board member. Solomon was also a member of the Board of
Directors. Each of these directors were also significant shareholders in the company.
21. No further board action was taken for the next year. This pattem of non-existent
monitoring, oversight and decision-making would not meaningfully change until the company
filed bankruptcy in 2016.
B. No coherent business plan; insiders personally enriched at the expense of the company and other shareholders.
22. After PSI was formed, the Board was appointed and officers selected, it was time
for PSI to begin operations. PSI, however, did not have a consistent business plan and did not
have an informed Board of Directors capable of insuring a steady march toward business success.
PSI also lacked a product to sell, and lacked the ability to commercialize its intellectual property
in the short-term. Solomon and Palmaz did, however, have a plan concerning how to start: raise
money in the private equity markets through exempt securities offerings of preferred stock of PSI.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 7
Beginning in May, 2009, Solomon and Palmaz authorized the issuance of Series A preferred stock
and started to solicit private investors for money.
a. PSI initially positioned as a bio-medical developer to commercialize the
S E S A M E stent.
23. According to PSI's initial Private Placement Memorandum ("PPM") provided to
investors in 2009, PSI's "initial market focus" was to be on "the coronary stent market which is
estimated at $6 billion annually." PSI told investors that the company expected to fde for a C E
Mark in the second calendar quarter of 2009 - e.g., before July 1, 2009 - and expected to obtain
approval of a C E Mark for its S E S A M E stent and "begin aggressive marketing of the S E S A M E
stent in Europe." The 2009 P P M claimed that products would soon be marketed in Europe: "[PSI]
intends to apply for European C E Mark in May 2009. Following C E Mark approval of S E S A M E
stent sales are expected to commence during the first quarter of 2010."
24. Private investors were not the only ones told about PSI's plans to apply for and
obtain a C E Mark for the S E S A M E stent, h i early 2009, PSI applied for a $3 million grant from
the Texas Emerging Technology Fund ("Texas ETF"), a fund run by the State of Texas to promote
the growth of nascent technology companies. PSI told the Texas ETF that it would file for C E
Mark approval in Apri l 2009 for its S E S A M E stent, projected launching the product in the first
calendar quarter of 2010, and would use any proceeds awarded from the Texas ETF to complete
the S E S A M E Stent C E Mark protocol and assist with one or two other research projects. Through
Solomon and Palmaz, PSI told the Texas ETF that they expected PSI to have six stent products
available for sale and generating in excess of $100 million annually by 2013.
25. As a result of its disclosures regarding the projected success of its S E S A M E stent,
alleged C E Mark approval, and the alleged ability to begin commercializing its products in early
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 8
2010, PSI was able to raise millions of dollars. Between 2009 and 2010, PSI raised approximately
$6.5 million in funds net of cash transaction costs.
b. PSI's business plan never coherent; Board created no oversight structure.
26. PSI's public disclosures, viewed in context, demonstrate that its business plan was
ever-changing, with no clear commitment to any single objective. Because no institutional
oversight structure or monitoring system was in place from the Board of Directors, no informed
decision-making was ever made by the Board with respect to strategic or even routine business
matters.
i. PSI never seriously approaches obtaining C E Mark approval for the SESAME stent; abandoned its efforts to do so without disclosing to investors.
27. In March of 2010, PSI's Executive Committee approved entering into an Award
and Security Agreement with the State of Texas acting by and through the Office ofthe Governor
Economic Development and Tourism. This enabled PSI to obtain a $3 m[llion grant from the
Texas ETF, which was to be used for the completion of C E Mark approval for the S E S A M E stent.
28. On information and belief, PSI never formally applied for a C E Mark for its
S E S A M E stent, despite representing to investors and shareholders that it intended to do so and
had, in fact, done so by May 2009. It appears that PSI simply began the process for C E Mark
approval and retained an outside consultant to begin the creation and review of a design dossier
for the S E S A M E stent. Indeed, PSI's design dossier, which was completed in May 2009,
affirmatively stated that an authorized European Community representative had not yet been
selected because PSI's management system and manufacturing facility were not yet registered
under the prevailing manufacturing standard ISO 13485. It also appears that PSI received almost
immediate pushback from its consultant regarding the S E S A M E stent and PSI's existing
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 9
manufacturing processes. Tliese issues were never disclosed to the investors. In any event, PSI
certainly never received the C E Mark approval that it projected to receive before the first calendar
quarter of 2010.
29. Instead, Solomon and Palmaz appear to have focused on raising additional funds
from private investors all while continuuig to project C E Mark approval and a commercialized
S E S A M E Stent in Europe. On September 16, 2010, the Solomon-Palmaz Executive Committee
allegedly authorized approximately 120,000 shares of Series B Preferred Stock to be issued and
sold to private investors. Solomon and Palmaz, through the Executive Committee, approved the
form and terms of the P P M ' s that were issued to investors to solicit the purchase of Series B
preferred shares.
30. The PPMs issued and provided to investors of the Series B stock began to describe
the S E S A M E Stent as being in the European C E Mark "approval process." Notably, the PPMs
did not disclose the stage ofthe approval process or explain the potential delays or even roadblocks
to ultimate approval. During the course of his investigation, however, the Trustee has yet to find
an actual completed Declaration of Conformity, which is necessary for ultimate approval of a C E
Mark for a medical device.
31. Uhimately, PSI would later disclose to investors that "the C E Mark application for
S E S A M E Stent was filed but the Company has delayed further commercialization efforts to assess
how the micro-groove and low profile technologies can advance the next generation of the
S E S A M E Stent." PSI did not disclose what the next generation of the S E S A M E Stent would be
or provide any other factual basis for its disclosure that it intended to delay its commercialization
strategy for the only product that it had allegedly developed during the previous three years.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 10
32. PSI raised in excess of $29 million in private funds from the Series B investors. It
never received C E Mark approval of the S E S A M E Stent and, in fact, abandoned the project
altogether before filing bankruptcy.
33. No meetings of the Board of Directors took place to deliberate, debate or even
discuss any of the foregoing material contracts or strategic decisions of the company. Indeed,
there were no Board meetings held in the years 2009, 2010 or 2011.
ii. In April 2012, New Strategy: licensing micro-groove technology or manufacture of a Palmaz branded device.
34. In Apri l 2012, PSI apparently shifted its commercialization strategy, and Solomon
began telling investors of plans to license micro-groove technology based upon existing Physical
Vapor Deposition technology, or to manufacture in-house products for distribution. No update of
the S E S A M E Stent or its C E Mark approval process was provided to investors in subsequent PPMs
or communications; rather, Solomon began touting PSI's exploration of a "frrst-in-man" study of
PSI's micro-grooving manufacturing process.
35. Despite the apparent shift in strategy and significant business deviation, no
meetings ofthe Board of Directors took place in 2012 to deliberate, debate or even discuss any of
the foregoing material contracts or strategic decisions ofthe company. Indeed, no meetings ofthe
Board of Directors were held at all in 2012.
i i i Octnher 201.̂ Annniincement: an agreement with a Fortune 500 company with an option to license Palmaz-patented technology based on a first-in-human study.
36. After over a year of purported "progress," Solomon told investors that PSI had
signed a definitive agreement with a Fortune 500 medical device company and would conduct a
first-in-human study ofthe effects of micro-grooves on existing coronary stents. As explained to
the investors, once the in-human study was completed, then the Fortune 500 company would have
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 11
an option to license the micro-groove technology and would provide royalties to PSI for sales of
the products.
37. Solomon also kept the investors baited with representations conceming a potential
pubhc offering of PSI. As Solomon explained in October 2013, he had "preliminary discussions
with investment bankers and analysts regarding market conditions and the Company" and that any
decision about going public would be dependent upon achieving successful results from the first-
in-human study of the micro-groove technology.
38. No meetings ofthe Board of Directors took place in 2013 to deliberate, debate or
even discuss any of the foregoing material contracts or strategic decisions ofthe company. Again,
no meetings of the Board of Directors took place at all in 2013.
iv. Solomon fails to disclose that the study had already been cancelled in 2013 and delayed until 2014.
39. Despite creating the clear and unmistakable impression that a first-in-human study
was just around the comer, and that the study could lead to licensing fees and even a potential
public offering, Solomon failed to disclose significant, material facts conceming the study.
Specifically, Solomon did not tell investors that the first-in-human study had been cancelled in
September of 2013 due to an alleged inventory mislabeling error. According to Solomon, the
study would not get approval from the Colombian govemment until sometime in 2014 and would
then commence (or re-commence) at that time. In October 2014, Solomon disclosed to investors
that the Columbian in-human study reached a 40 patient milestone and indicated that "one more
patient is required to complete this portion of the study." Again, Solomon played up the potential
for a licensing agreement with the Fortune 500 medical device company that was partnering with
PSI on the study.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 12
40. On Apr i l 22, 2015, Solomon and Palmaz provide another update to PSI's
shareholders, but did not provide additional detail about the completion of the Colombian in
human clinical trial or the potential licensing arrangement with its previously undisclosed
"partner." Indeed, the Apri l 2015 shareholder update was noticeably silent with respect to future
business prospects of the company, despite describing in granular detail the development of PSI's
micro-grooving manufacturing processes.
41. Over the course of the previous six to seven years, Solomon and Palmaz had
provided numerous presentations and updates to existing and prospective investors. In virtually
every investor communication, Solomon and Palmaz focused on the business prospects of either
(a) the S E S A M E Stent or (b) the licensing of its micro-grooving technology. In both instances,
these statements represented the core business prospect of PSI and were at all times material to
investors and shareholders.
42. During the vast majority, i f not all ofthis time period, the Board of Directors was
knowingly absent and uninformed.
c. Meanwhile, Solomon and Palmaz took large sums of money out of the company as personal compensation and awarded themselves large stock grants.
43. Solomon and Palmaz significantly enriched themselves during a period of time
when PSI did not have revenue and did not have a commercialized product capable of generating
revenue. Between 2008 and 2013, Solomon took over $3 million in compensation from the
company. During the same time period, Palmaz took nearly $1.4 million from the company in the
form of salary and payments to his wife, Amalia Palmaz. On Iuly 12, 2012, the Executive
Committee, viz. Solomon and Palmaz, granted Solomon 1,250,000 shares of common stock and
Palmaz 1,000,000 shares of common stock. Allegedly, these awards were given for exemplary
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 13
service and commitment to tlie corporation. In reality, these awards were nothing but a naked grab
of additional stock holdings to further entrench their position as among the company's largest
stockholders.
44. On May 7, 2013, Solomon and Palmaz met as the Executive Committee and
approved a new employment agreement for Solomon with a five year term. The following month
the Executive Committee met and approved a new five year employment agreement for Palmaz.
45. No reasonably prudent director or officer would compensate themselves so
lucratively given the financial condition ofthe company or its immediate prospects.
d. While Solomon and Palmaz received large sums of money, PSI generated no organic revenue and became more insolvent.
46. The actions of Solomon and Palmaz are particularly egregious considering PSI's
financial position. As ofthe year end of June 30, 2012, PSI sustained a $5.4 miUion operating
loss, a nearly $30 miUion accumulated deficit, and appeared insolvent from a balance sheet
perspective. The insolvency and operating losses worsened in 2013, despite PSI signing a supply
contract with a company that did generate a nominal amount of revenue for the year. In 2013, PSI
eamed net revenue of $759,000, but this revenue was not generated from any of its previously
disclosed products-to-be-commercialized.
47. Even with this boost in net revenue, PSI still managed to incur a $9.4 million net
loss and plunge deeper into balance sheet insolvency. PSI's accumulated deficit at June 30, 2013
stood at $38.9 million. Remarkably, after blowing through nearly $40 milhon 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.
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 14
e. After spending millions of dollars in investor funds with nothing to show for it, Solomon was forced to resign; the Board covers it up.
48. On August 27,2014, the ful l Board of Directors met to discuss, among other things,
the terms of Solomon's employment. This was the first meeting ofthe full Board of Directors in
more than six years, and Julio Palmaz's attorney, Jason Davis, was provided a copy ofthe agenda
and bullet point items for this meeting for advance review. On information and belief, M r . Davis
began regularly attending board meetings at this time and received copies of draft minutes for
review and editing.
49. During this meeting, the Board stated its desire to "modify the tenns of Mr.
Solomon's employment with the Company to conserve Company resources and so that the terms
of his employment are more consistent with the terms the Board members believe are customary
for a venture-backed medical device company at a similar stage as the Company." The Board
resolved to require Solomon and Palmaz to decide and report back to the Board any modifications
which should be made to the Solomon employment agreement. Tellingly, no board minutes reflect
further discussion or approval of any modified employment agreement or further board
deliberation on the matter.
50. In reality, the Board apparently discovered that Solomon had taken excessive
compensation out of the company, and the Board worked to modify his employment agreement to
limit his employment to a single year term. It appears the Board wanted to use that one-year term
to force Solomon to re-pay monies previously taken out of the company. Although the Board
Resolution required Palmaz and Solomon to report after the August 27"^ Board meeting about the
modifications, it does not appear any such report occurred.
51. Instead, there were discussions in October of 2014 between John Asel, a long-time
outside advisor to the Palmaz family, and PSI's counsel concerning the terms of the modified
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 15
employment agreements. Apparently, the Board acted without written consent or a formal meeting
and approved a modified employment agreement that paid Solomon a $400,000 base salary and
terminated his employment as of August 27, 2015. On information and belief, Julio Palmaz's
attomey and PSI's attomey, Jason Davis, attended this meeting and witnessed the Board's
interactions with Solomon, and Mr . Davis clearly knew about the Solomon employment issues.
52. In March of 2015, PSI and Solomon again re-negotiated the terms of Solomon's
employment. In a revised letter employment agreement, Solomon and PSI allegedly agreed to new
terms for his continued employment, which removed the one-year termination provision,
maintained the $400,000 base salary compensation level, and added additional confidentiality
provisions that extend beyond what is typical for executive employment agreements. In particular,
the new employment agreement required Solomon to maintain confidentiality regarding a host of
items, including, among other things:
• the Company's financial data, business and management information, strategies and plans and intemal practices and procedures, including but not limited to intemal fmancial records;
• salary, bonus and other personnel information; and
e decisions and deliberations of Company's committees or boards.
53. The March 2015 employment agreement revision has all the hallmarks of an
agreement designed simply to buy Solomon's silence and acquiescence. No new material terms
were included, save and except for onerous and far-reaching confidentiality provisions. On
information and belief, Solomon did not re-pay monies owed to Lhe Company and Lhe Board did
not later seek to recoup those lost funds. Instead, on information and belief the Board simply
permitted Solomon to accrue his salary until his departure in August 2015.
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 16
f. The Board granted security interests in all of PSI's intellectual property to the insider director and major shareholder; appointed a long-time Palmaz family advisor to the Board.
54. In July of 2015, the fu l l Board of Directors and Asel were keenly aware of the
precarious financial position of PSI. The company lacked sufficient revenue to continue
operations as a going concem and lacked any product to bring to market in a timely fashion. What
PSI did have was a CEO who was being forced out for taking too much money from the company
while raising investor funds.
55. Despite these clearly known facts, the Board determined to forego timely seeking
the protection of a bankruptcy court or to otherwise orderly liquidate; instead it continued to seek
loans from insiders. In September 2015, the Board allegedly authorized approximately $4.5
million in insider loans from Palmaz's wife's company, Oak Comt Partners, Ltd., to repay two
notes with a face value of $2.5 million. Amalia Palmaz attended this board meeting along with
her husband and the other directors Phillip Romano and Eugene Sprague.
56. In exchange for the insider loans, the Board approved granting a security interest
in all of PSI's intellectual property to Palmaz and Oak Court Partners, Ltd. The transaction should
not have been approved because it was not entirely fair to the interests ofthe corporation. Granting
the insiders a security interest on the entire intellectual property portfolio of PSI was a breach of
the duty of loyalty and unfair to the corporate enterprise.
57. Moreover, Asel , a long-time advisor and associate ofthe Palmaz family, had been
working closely with Palmaz on PSI matters for many months in 2014 and 2015. Although Asel
had yet to join the Board of Directors, he did attend the first ful l board meeting PSI held in six
years on August 27, 2014. Asel also attended meetings in November of 2014 and May, June and
September of 2015. Asel was elected Interim Chief Financial Officer by written consent on August
7, 2015 and appointed to the full Board of Directors on September 24, 2015.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 17
58. Despite liis relative newness as an official board member, Asel clearly knew the
financial condition of the company and had actual knowledge of most, i f not all, of the inner
workings of PSI's operations. Asel had acted as an advisor and C P A for the Palmaz family for
many years and although not officially an officer or director until later 2015, played a significant
role in business decisions and consultations. Indeed, his presence at board meetings before his
appointment is indicative of his role in the company. Asel acted as a secretaiy for the meeting in
September 2015 in which the interested director loan transactions were approved.
g. PSI quickly unraveled in the Fall of 2015.
59. In August 2015, Palmaz finally revealed that PSI's fabrication methods had been
rejected by all companies which had been approached, and he announced another shift of the
business plan towards seeking U.S. F D A approval of one or more PSI devices. As Palmaz stated
in his August 13, 2015 shareholder update, PSI's "efforts to partner with large medical device
manufacturers have encountered a consistent negative attitude by their R & D teams" and that PSI's
"advanced fabrication methods have been highly resisted by all companies we have approached to
partner with. . ." As Palmaz put it, PSI's previous efforts had been "time consuming and
exhausting" and "resulted in negative responses in the end." In the end, Palmaz admitted that PSI
had nothing to show for the investor monies raised the previous seven years.
60. Although the August 2015 shareholder communication was candid in some
respects, it was less so in other unportant aspects. Palmaz explained IhaL his family invested
millions into the company personally, and noted that had this not occurred the Company would
likely have been forced to file for bankruptcy or liquidate. Palmaz chose not to inform the investors
that he and his wife's company. Oak Court Partners, Ltd., had obtained a security interest in all
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 18
intellectual property ofthe company, or that an earlier liquidation event would likely have resulted
in a far better outcome for everyone but his family from a fmancial perspective.
61. Palmaz was also less than candid conceming the departure of Solomon, describing
his departure as a resignation "to pursue other opportunities." There was no disclosure of
Solomon's excessive or unauthorized compensation, no mention that the company had modified
Solomon's employment agreement in August 2014 to limit his remaining employment. In essence,
Solomon's "resignation" was a foregone conclusion in the Fall of 2014 that was due to occur in
August 2015. Yet, Palmaz passed it off as a mutual parting ofthe ways based upon Solomon's
voluntary resignation.
h. In September 2015, PSI hired a new C E O and authorized a final round of private investments.
62. In September 2015, PSI decided to hire Philippe Marco ("Marco") as C E O and
began raising private capital again through another Regulation D offering.
63. On November 5, 2015, the Board of Directors approved the issuance of Series C
preferred stock the issuance of a P P M for the solicitation of investments from private individuals.
The Series C capital raise was an abject failure. As of December 30, 2015, PSI raised only
$167,889.10, and determined - far too late - that it needed to seek financing from other sources,
including traditional sources such as venture capital funds. The Board estimated that it would take
60 days to obtain such financing or determine i f it would be successful and, as a resuh, authorized
another insider loan of $1.5 million from Oak Court Partners, Ltd.
i. The Board authorized a Bankruptcy Filing.
64. PSI was unable to raise additional funds and continued to rely on insider "loans"
for ongoing operations. On February 5, 2016, the Board of Directors met to discuss possible sale
or bankruptcy altematives and authorized exploring a bankruptcy filing. A t the meeting, the Board
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 19
was mfonned that from November 6, 2015 to January 15, 2016, management met with
shareholders on four separate occasions to discuss the Series C offering with no significant
response. From December to February 3, 2016, management met with other venture capital funds
and institutional investors and received unanimous negative responses.
65. On March 4, 2016, the Board of Directors authorized the filing of a voluntary
petition for relief under Chapter 11 ofthe Bankruptcy Code.
C. The Board of Directors utterly failed to monitor and supervise the financial, accounting and operational systems of PSI.
66. The PSI Board of Directors was characterized by grossly negligent corporate
governance behavior from the company's genesis. The Board of Directors from 2008 until 2015
consisted of only four members - three employees and an alleged outsider that held substantial
stock in the company. The full Board of Directors did not meet to deliberate or discuss business
or financial matters from June 30, 2008 until August 27, 2014. The full Board of Directors took
no action as a fuU goveming body for six years during the life of PSI.
a. Board and executive leadership roles at PSI were dominated and controlled by the largest shareholders and insiders.
67. 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 ofthe Board
of Directors, which appears to be have been impennissibly authorized and certainly did not follow
form or practice consistent with PSI's bylaws. In particular, PSI's bylaws required that any
committees be created and members appointed at the direction ofthe ful l Board of Directors. PSI's
bylaws also required that each committee keep regular minutes of its meetings and report to the
fu l l Board of Directors. These actions did not occur. Instead, Solomon created the Executive
Committee himself and delegated all Board authority to the Executive Committee. Based on the
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 20
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.
68. Nevertheless, throughout PSI's existence between 2008 and August 27, 2014,
Solomon and Palmaz conducted substantial business that should have been brought to the ful l
Board of Directors for approval, but was not. Through Executive Committee action, Solomon and
Palmaz authorized millions of dollars of preferred stock offerings, sales of warrants and issuances
of convertible promissory notes, issuance of common stock to vendors in lieu of cash payments,
bonuses to executive officers, substantial personal loans to Solomon, large grants of common stock
to themselves, and lucrative modifications to their employment agreements. A l l of these actions
should have been reported to the ful l Board and been deliberated and resolved with ful l Board
participation.
69. In August of 2014, the ful l Board of Directors fmally woke up from its deep slumber
and convened a ful l meeting to discuss the dire financial condition ofthe company and, essentially,
to be brought up to speed on what had transpired over the last six years. A t this meeting, Eugene
Sprague ("Sprague") was appointed to become a member of the Board. Also present at this
meeting were John Asel ("Asel") and Amalia Palmaz ("Mrs. Palmaz"). The Board decided that
no committees should exist and dissolved any committees that did exist, ifany.
70. The Board, realizing the first six years of corporate governance were likely
unlawful, attempted to ratify the previous actions ofthe illegitimate and now dissolved Executive
Committee, and passed an onmibus resolution ratifying and adopting 13 actions the Executive
Committee had taken during the previous six years. The Board's belated action to retroactively
ratify the Executive Committee's previous acts were ineffective because they were not approved
by a majority of disinterested directors, and cannot satisfy the entire faimess test to the corporation.
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 21
Palmaz, Solomon and Romano were all deeply conflicted directors at the time of the ratification
because Palmaz and Solomon had taken actions without authority previously and Romano had
abdicated his duty of oversight and obligation to inform himself of PSI's corporate activities for
the previous six years. A l l three of these directors participated in the meeting, voted on the alleged
ratification resolution and, as a result, tainted any such effort to ratify the previous acts.
b. Prudent corporate governance practices were non-existent at PSI.
71. Neither the Executive Committee nor the ful l Board of Directors had regular or
periodic meetings. Neither the Executive Committee nor the ful l Board of Directors had policies,
procedures or principles in place for routine monitoring and oversight of the company's fmancial
function, accounting function or operations. No audit committee existed. No compensation
committee existed. No special committees to handle litigation or other extraordinary events were
ever created or existed.
72. PSI had no system of intemal controls for its accounting functions and no system
in place to ensure the Board of Directors received timely and accurate information conceming the
financial condition ofthe company. Indeed, until August 27, 2014, there is not a single meeting
of the fu l l Board of Directors to discuss the financial prospects or existing condition of the
company.
73. Palmaz, Solomon, Banas and Romano' s actions constitute an intentional dereliction
of duty or a conscious disregard for their fiduciary responsibilities. At a minimum, Banas and
Romano failed to be informed ofa l l facts material to corporate decisions as they were being made.
At worst, each of these individuals knew they were breaching their fiduciary duties to oversee the
company's operations as a reasonably pmdent director and proceeded to delegate the job to
conflicted, inside directors until it was too late. In any event, the PSI Board of Directors was run
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 22
with an utter failure to monitor and oversee the operations of the company, and blatantly
disregarded its obligations to remain informed to make reasonable business judgments.
c. Solomon recklessly controlled the flow of financial information about PSI to the Board and investors.
74. In addition, it appears that Solomon embarked on a pattem of non-disclosure to
inquiring investors and, perhaps, even to the Board of Directors. On information and belief,
Solomon maintained close control over the fmancial and accounting side of PSI's operations.
PSI's corporate offices, including financial and accounting processes (to the extent they existed),
were located in Dallas, Texas. Palmaz and the scientific operational side of the business were
located in Fremont, Califomia or San Antonio, Texas. The separate office locations made it easier
for Solomon to filter information to both investors and his fellow board members as be saw fit.
75. Although it appears that PSI engaged an independent auditing firm to audit the
company's books and records and year-end financial statements, no actual audit opinions were
issued until the company was already in deep fmancial distress. On information and belief,
Solomon engaged Weaver & Tidwell to act as PSI's auditors beginning in 2008 or 2009, but
Solomon and Connelly refused to permit the auditors to issue fmal audit reports on the company's
financial statements until the summer of 2014 - just before the Board of Directors convened its
first meeting in over six years.
76. Solomon's refusal to permit an audit opinion issue was reckless in that it prevented
full and fair disclosure of PSI's current fmancial condition to both the Board, existing mvestors
and prospective investors deciding whether to invest in PSI at the time the audits were being
conducted. The refusal to permit an audit opinion issue allowed Palmaz and Solomon to personally
solicit investments from individual mvestors without ever having to disclose fully the existing
financial condition of the company. And, indeed, none of the Private Placement Memoranda
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 23
("PPMs") that were provided to investors ever appear to provide a complete fmancial picture of
the company.
77. As a resuh of Solomon's manipulations of the outside accountants, neither the
Board nor the investors received real time financial infonnation or as close to real time information
that an audited financial statement could have provided during 2008, 2009, 2010, 2011, 2012 or
2013.
78. On December 7, 2015, Weaver & Tidwell issued an audh report for PSI's 2014 and
2015 fiscal years. Weaver & Tidwell included a "going concern" disclosure in its fmal audh
opinion. Predictably, the company filed bankruptcy approximately four months later after
attempting and failing to raise additional funds in the private equity markets in the wake of this
disclosure.
D. The Board committed egregious breaches of the duty of loyalty.
79. A director owes an absolute duty of loyalty to the company. Any action that tends
to personally enrich or provides direct or indirect benefit to a director is an interested transaction
that must be approved entirely by a disinterested board of directors and be entirely fair to the
company. Solomon and Palmaz took numerous actions that violate this precept of sound corporate
governance law.
a. Solomon and Palmaz excessively compensated themselves in a manner that was personally enriching and not entirely fair to PSI or its stakeholders.
80. A reasonably prudent board of directors would only authorize or grant
compensation that is reasonable and not excessive given a company's financial condition. PSI
paid Palmaz and Solomon excessive personal compensation during the life of the company and
during the tenure of their roles as executive officers. Solomon was paid in excess of $3 million
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 24
between 2008 and 2013 and an additional $400,000 between 2014 and the time he left the company
in 2015. 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.
b. Solomon and Palmaz failed to place the company into bankruptcy timely because they did not want to lose their personal stake or the rights to the intellectual property.
81. Palmaz and Solomon controlled large blocks of PSI's common stock and together
could wield approximately 30% of the voting power of the common stock. Palmaz also had a
close affinity to the intellectual property portfolio because he believed that it rightfully belonged
to him and was an outgrowth of his personal scientific achievements. Under no circumstances did
these individuals want to lose either their investments or their rights to the intellectual property
portfolio PSI owned and controlled.
82. In August, 2014, when the ful l Board of Directors woke up and decided to convene
a meeting to discuss the business and financial affahs of the company, it was clear to any
reasonably prudent director or businessperson that PSI could not continue as a going concem. The
auditors had just issued fmancial statements for the previous fiscal year (2013) that showed a net
operating loss of $9.4 milhon, an accumulated defich of $38 million and only $1.15 million in
revenue for 2013.
83. Had the Board informed hself of the ful l financial picture at the time, it would have
also leamed that fiscal year 2014 promised to be just as bleak. Rich Connelly ("Connelly"), the
Chief Financial Officer, issued a confidential unaudited financial statement in July of 2014 that
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 25
showed PSI, for the nine months ending March 31, 2014, to have less than a miUion dollars of
revenue and already in excess of $4.4 million in operating losses.
84. Any reasonably prudent director at the time would have considered a bankruptcy
fding or orderly liquidation of the company's assets to repay creditors and investors what they
could. Instead, the conflicted Board of Dhectors, dominated by Palmaz, decided to ratify Palmaz
and Solomon's prior unauthorized activities, grant additional common stock to Palmaz, Solomon,
Romano, Sprague, and Connelly. The minutes of this meeting do not reflect any serious
deliberation or consideration of viable ahernatives and it appears, based on subsequent board
meetings, that the Board decided to plunge the company further into debt by considering and
pursuing a sale of convertible promissory notes as a means to raise funds and continue operations.
85. The failure of the Board of Directors to place the company into bankruptcy or
otherwise consider an orderly liquidation of the assets in August, 2014 was a breach of the
fiduciary duty of loyalty because it preferred each of the directors' own personal interests over the
corporate enterprise as a whole. The only dhectors deliberating and voting during the August
meeting held substantial stockholdings, lucrative compensation packages, or a significant personal
connection to the intellectual property portfolio. Each of them failed to consider the interests of
the entire corporation and, as a resuh, failed to act m a manner that was entirely fair to the
corporation.
c. The Board of Directors breached its duty of loyalty when it authorized granting a security interest in all of PSI's intellectual property to Palmaz, his wife and their affdiated companies.
86. On July 16, 2015, the Board of Directors considered and permitted Amalia Palmaz
to loan approximately $4.5 million to PSI to repay two notes in the principal amount of $1.5 million
to SPI Dallas Investments, L P and $1 million to Lennox Caphal Partners, LP. These SPI and
ORIGINAL PETITION AND P L E A IN INTERVENTION - Page 26
Lennox notes were executed in July, 2014 when the company was insolvent and were done in
comiection with a rescission of investments previously made in PSI. Clearly, the company did not
have the ability to simply refund the $2.5 million in rescinded investments because it did not have
sufficient cash on hand to do so. histead, PSI, through Solomon, opted to issue one-year
promissory notes with a secured interest in PSI's intellectual property.
87. It does not appear that the Board ever authorized the agreement to rescind the
investment, was not informed ofthe decision to rescind the SPI and Lennox investments, was not
informed about the notes issued to SPI and Lennox and was not aware that a security interest in
PSI's intellectual property had been granted. Solomon breached his fiduciary duties in causing
PSI to enter into the notes and the Board of Directors breached their duties of oversight to ensure
that the most valuable assets of the company were protected.
88. The SPI and Lennox notes matured on July 6, 2015 and PSI defaulted because the
company still lacked the funds to repay the notes. Instead, PSI shifted the security interests to
Palmaz family insiders for a draw note used to cover the repayment to SPI and Lennox.
89. PSI entered into a loan agreement with Oak Court Partners, Ltd., owned and
controlled by Amalia Palmaz and closely affiliated with Julio Palmaz, for funds to repay the notes.
In exchange for the repayment of the SPI and Lennox notes, PSI granted Palmaz and Oak Court
Partners, Ltd. a security interest in all of the intellectual property portfolio of PSI, which effectively
ceded complete control ofthe company's only potentially valuable asset to its largest shareholder
and his wife. This action was to the detriment of every other stockholder in the company.
90. The July 16, 2015 note and security agreement with Palmaz and Oak Court
Partners, Ltd. constituted an interested transaction and a breach of the duty of loyalty. The granting
of a security interest in all of the intellectual property portfolio of the company to the largest
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 27
shareholder was not entirely fair to the corporation and cannot pass the entire fairness test. Either
the directors were not adequately infonned about the value of the intellectual property portfolio
and did not seek to obtain reasonably equivalent consideration for the granting of the security
interest, or they did know the value of the intellectual property portfolio and failed to demand
reasonably equivalent consideration for granting a blanket security interest in the company's single
most valuable asset. In either event, the decision to take a relatively nominal insider loan for a
blanket security interest in all intellectual property was a breach of the duty of loyalty, which
damaged the company.
VII. CAUSES OF ACTION
Count 1: Breach of Fiduciary Duty Against Inside Directors (Against Defendants Palmaz and Solomon)
91. The Trustee incorporates the foregoing allegations and incorporates them by
reference as i f fully set forth herein.
92. Defendants Palmaz and Solomon were directors, officers and large shareholders of
PSI. As a matter of law, Defendants Palmaz and Solomon owed strict fiduciary duties to PSI and
hs stakeholders. Defendants Palmaz and Solomon owed a duty of good faith, loyalty and care to
PSI and its stakeholders.
93. Defendants Palmaz and Solomon breached their fiduciary duties to PSI in at least
the following ways:
a. Defendant Solomon created a rogue Executive Committee comprised of solely interested directors and impermissibly delegated ful l Board authority to the committee;
b. Defendants Palmaz and Solomon conducted PSI business affahs through the instrumentality of the Executive Committee without reporting to the ful l Board of Directors and keeping the full Board of Directors informed ofbusiness and financial operations ofthe company for six years;
ORIGINAL PETITION AND PLEA IN E^TERVENTION - Page 28
c. Defendants Palmaz and Solomon authorized and issued PPMs as directors of the company that contained misrepresentations to solicit investors to fund the operations of PSI;
d. Defendants Palmaz and Solomon drew excessive compensation and stock grants from PSI;
e Defendants Palmaz and Solomon failed to institute policies and procedures that would ensure the Board of Directors ability to exercise its duty to oversee the business and fmancial affairs of the Company, including ensuring proper oversight of the investor solicitation process, accounting systems and intemal controls of PSI;
f Defendants Palmaz and Solomon failed to place the interests of PSI and hs stakeholders above their own personal fmancial interest when they failed to provide audited fmancial statements to the ful l Board of Directors until 2014;
g Defendants Pahnaz and Solomon failed to place the interests of PSI and its stakeholders above thek own personal fmancial interests in failing to consider and place PSI into bankruptcy or sell substantially all of hs assets in 2014 when it was clear the company could not continue as a going concern;
h. Defendants Palmaz and Solomon failed to place the interests of PSI and its stakeholders above their own personal fmancial interests when they concealed the true reason for Solomon's departure and modified Solomon's employment agreement;
i . Defendants Palmaz and Solomon failed to place the interests of PSI and hs stakeholders above theh own personal financial interest when they entered into approximately $2.5 million worth of notes to SPI and Lennox for the rescission of an earlier investment when PSI did not have the ability to repay the investors;
j . Defendants Palmaz and Solomon failed to place the interests of PSI and hs stakeholders above their own personal financial interest when they approved insider loans to Oak Court Partners, Ltd. to repay the SPI and Lennox notes and granted a security interest in all assets of PSI to Palmaz and his wife's company;
k. Defendants Palmaz and Solomon failed to place the interests of PSI and its stakeholders above their own personal financial interest when they failed to consider banlcmptcy or sell substantially all of PSI's assets in 2015 when they granted security interests to Palmaz and Oak Court Partners, Ltd.; and
1. Defendants Palmaz and Solomon failed to place the interests of PSI and its stakeholders above their own when they failed to preserve critical electronic data and electronic mail after investors began raising issues with the nature of their
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 29
investments and certainly at or about the time of Solomon's fonnal resignation on or about July 24, 2015.
94. Defendants Palmaz and Solomon's breaches of fiduciary duty are not entitled to the
protections of the business judgment rule because many, if not all, of their actions constituted
uninformed actions or were interested director transactions that were not entirely fair to the
interests of the company or its stakeholders. Defendants Palmaz and Solomon's breaches of
fiduciary duty are not entitled to the protections of any exculpatory clause in PSI's Articles of
Incorporation because they either constitute acts of gross negligence or breaches of the duty of
loyalty and, as such, are not protected.
95. Defendants Palmaz and Solomon's breaches of fiduciary duty caused substantial
damages to PSI, including, at a minimum, the loss ofthe value ofthe intellectual property portfolio,
the going concem value ofthe enterprise as a properly run company, and the amount of excessive
compensation paid to inside directors at a time when the company was insolvent.
Count 2: Breach of Fiduciary Duty Against Outside Directors (Against Defendants Banas, Romano and Sprague)
96. The Trastee incorporates the foregoing allegations and incorporates them by
reference as i f fully set forth herein.
97. Defendant Banas was a director, officer and large shareholder of PSI. Defendants
Romano and Sprague were directors and large shareholders of PSI. As a matter of law. Defendants
Banas, Romano and Sprague owed strict fiduciary duties to PSI and its stakeholders. Defendants
Palmaz and Solomon owed a duty of good faith, loyalty and care to PSI and hs stakeholders.
98. Defendants Banas, Romano and Sprague breached the fiduciary duties to PSI in at
least the following ways:
ORIGINAL PETITION A N D PLEA JN INTERVENTION - Page 30
a. Defendants Banas and Romano permitted Palmaz to create an Executive Committee without authority from the ful l Board of Directors in violation of PSI's corporate bylaws;
b. Defendants Banas and Romano abdicated their duties and permitted Palmaz and Solomon to conduct PSI business affairs through the instrumentality of the Executive Committee without reporting to the ful l Board of Directors and keeping the ful l Board of Directors infonned of business and fmancial operations of the company for six years;
c. Defendants Banas and Romano abdicated their duties and permitted Palmaz and Solomon to authorize and issued PPMs as directors of the company that contained misrepresentations to solicit investors to fund the operations of PSI;
d. Defendants Banas and Romano abdicated their duties and permitted Palmaz and Solomon to draw excessive compensation and stock grants from PSI;
e. Defendants Banas, Romano and Sprague abdicated their duties and failed to institute policies and procedures that would ensure the Board of Dhectors ability to exercise its duty to oversee the business and fmancial affairs of the Company, including ensuring proper oversight of the investor solicitation process, accounting systems and intemal controls of PSI;
f Defendants Banas and Romano abdicated their fiduciary duties and failed to place the interests of PSI and its stakeholders above their own personal financial interest when they failed to demand audited financial statements to the ful l Board of Directors unth 2014;
g. Defendants Romano and Sprague abdicated their duties and failed to place the interests of PSI and its stakeholders above their own personal fmancial interests in failing to consider and place PSI into bankruptcy or sell substantially all of its assets in 2014 when it was clear the company could not continue as a going concern;
h. Defendants Romano and Sprague failed to place the interests of PSI and its stakeholders above their own personal financial interests when they concealed the true reason for Solomon's departure and modified Solomon's employment agreement;
i . Defendants Romano and Sprague abdicated their duties and failed to place the interests of PSI and its stakeholders above their own personal financial interest when they permitted Solomon and Palmaz to enter into approximately $2.5 million worth of notes to SPI and Lennox for the rescission of an earlier investment when PSI did not have the ability to repay the investors;
j . Defendants Romano and Sprague failed to place the interests of PSI and its stakeholders above their own personal financial interests when they approved insider
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 31
loans to Oak Court Partners, Ltd. to repay the SPI and Lennox notes and granted a securhy interest in all assets of PSI to Pahnaz and his wife's company;
k. Defendants Romano and Sprague failed to place the interests of PSI and hs stakeholders above their own personal financial interest when they failed to consider bankruptcy or sell substantially all of PSI's assets in 2015 when they granted security interests to Palmaz and Oak Court Partners, Ltd.; and
1. Defendants Romano and Sprague abdicated their duties and failed to place the interests of PSI and hs stakeholders above their own when they failed to preserve critical electronic data and electronic mail after investors began raising issues with the nature of their investments and certainly at or about the time of Solomon's formal resignation on or about July 24, 2015.
99. Defendants Banas's, Romano's and Sprague's breaches of fiduciary duty are not
entitled to the protections ofthe business judgment rule because many, i f not all, of their actions
constituted uninformed actions or were interested director transactions that were not entirely fair
to the interests ofthe company or hs stakeholders. Defendants' breaches of fiduciary duty are not
entitled to the protections of any exculpatory clause in PSI's Articles of Incorporation because
they either constitute acts of gross negligence or breaches ofthe duty of loyalty, and as such, are
not protected.
100. Defendants breaches of fiduciary duty caused substantial damages to PSI,
including, at a minimum, the loss of the value of the intellectual property portfolio, the going
concem value of the enterprise as a properly run company, and the amount of excessive
compensation paid to inside directors at a time when the company was insolvent.
Count 3: Breach of Fiduciary Duty Against Officers (Against Defendants Solomon)
101. The Tmstee incorporates the foregoing allegations and incorporates them by
reference as i f fully set forth herein.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 32
102. Defendant Solomon was a high-level executive officers at PSI. Solomon was the
CEO from 2008 until 2015. Solomon was a major shareholder of PSI. As a matter of law,
Defendant Solomon owed strict fiduciary duties to PSI and hs stakeholders. Defendant Solomon
owed a duty of good faith, loyalty and care to PSI and hs stakeholders.
103. Defendant Solomon breached his fiduciary duties to PSI in at least the following
ways:
a. Defendant Solomon drew excessive compensation and stock grants from PSI at a time when the company was insolvent or otherwise incapable of paying exorbhant excessive compensation;
b. Defendant Solomon failed to institute policies and procedures that would ensure the Board of Directors' ability to exercise hs duty to oversee the business and financial affairs of the Company, including ensuring proper oversight of the investor solicitation process, accounting systems and intemal controls of PSI;
c. Defendant Solomon failed to place the interests of PSI and hs stakeholders above his own when he failed to authorize audited fmancial statements be issued and provide timely financial reporting to the Board of Directors; and
d. Defendant Solomon abdicated his duties and failed to place the interests of PSI and its stakeholders above his own when he failed to preserve critical electronic data and electronic mail after investors began raising issues with the nature of their investments and certainly at or about the time of Solomon's formal departure on or about July 24, 2015.
104. Defendant Solomon's breaches of fiduciary duty are not entitied to the protections
of the business judgment rule because many, i f not all, of these actions constituted uninformed
actions or were interested dhector transactions that were not entirely fair to the interests of the
company or hs stakeholders. Defendant's breaches of fiduciary duty are not entitied to the
protections of any exculpatory clause in PSI's Articles of Incoiporation because they either
constitute acts of gross negligence or breaches of the duty of loyalty and, as such, are not protected.
105. Defendant's breaches of fiduciary duty caused substantial damages to PSI,
including, at a minimum, the loss of the value of the intellecttial property portfolio, the going
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 33
concem value of the enterprise as a properly run company, and the amount of excessive
compensation paid to inside directors at a time when the company was insolvent.
Count 4: Aiding and Abetting Breach of Fiduciary Duty (Against Defendants Asel)
106. The Tmstee incorporates the foregoing aUegations and incorporates them by
reference as i f fully set forth herein.
107. Defendant Asel was intimately familiar with Solomon's and Palmaz's fiduciary
positions at PSI and were actually aware that Solomon and Palmaz owed fiduciary duties to PSI.
108. Defendant Asel was an outside business consultant and shareholder of PSI. Asel
has a long history as a financial advisor or C P A to the Palmaz family. Defendant Asel knew and
understood that Palmaz, Solomon, Romano and Sprague owed fiduciary duties to PSI. As set forth
above. Defendants Palmaz, Solomon, Romano and Sprague committed numerous breaches of
fiduciary duty that caused injury to PSI. Specifically, Defendant Asel was aware that these
Defendants were breaching his fiduciary duty to PSI when he assisted in the following acts:
a. Defendant Asel substantially assisted and/or encouraged the directors to not consider or otherwise place PSI into bankruptcy or sell substantially all of hs assets in 2014 when it was clear the company could not continue as a going concem;
b. Defendant Asel substantially assisted and/or encouraged the directors in concealing the true reason for Solomon's departure and modified Solomon's employment agreement;
c. Defendant Asel substantially assisted and/or encouraged the dhectors in approving insider loans to Oak Court Partners, Ltd. to repay the SPI and Lennox notes and granted a security interest in all assets of PSI to Palmaz and his wife's company;
d. Defendant Asel substantially assisted and/or encouraged the directors to not consider or otherwise place PSI into banki-uptcy or sell substantially all of PSI's assets in 2015 when they granted security interests to Palmaz and Oak Court Partners, Ltd.; and
e. Defendant Asel substantially assisted and/or encouraged the directors and officers of PSI to not preserve crhical electronic data and electronic mail after investors began
ORIGINAL PETITION A N D PLEA IN EsfTERVENTION - Page 34
raising issues with the nature of their investments and certainly at or about the time of Solomon's formal resignation on or about July 24, 2015.
109. Defendant Asel were mstrumental in the foregoing breaches of fiduciary duty
because they were outside business advisors that had the ear of Palmaz, provided advice and
counsel to the Board of Directors and actually provided funds to continue PSI for the Palmaz's
family's personal benefit. Defendant Asel's assistance was a substantial factor in causing these
breaches of fiduciary duty. Defendant Asel's acts and omissions in providing advice, counsel and
funds all in favor of ensuring Palmaz did not lose his rights to the PSI intellectual property portfolio
and theh own stockholdings evince a clear intent to assist these breaches of fiduciary duty. The
primary breach of fiduciary duty was grossly negligent and Defendant Asel's aiding and abetting
makes him vicariously liable for such grossly negligent conduct.
Count 5: Negligent Misrepresentation (As Assignee Against Defendants Palmaz and Solomon)
110. The Trustee incorporates the foregoing allegations and incorporates them by
reference as i f fully set forth herein. The Trustee asserts Count 6 Negligent Misrepresentation
against Defendants Palmaz and Solomon in his capacity as assignee of individual investors' claims
for misrepresentation.
U l . Defendants Palmaz and Solomon failed to exercise due care in providing
investment materials to investors for evaluation. Defendants owed individual investors a duty of
reasonable care at all times, but breached that duty. Defendants breached their duty of care in
failing to disclose material facts they knew and failing to conduct a reasonable investigation before
soliching investtnents. The Defendants negligently represented or omitted from statements
necessary to make them not misleading at least the following:
a. The highest level of education completed by the CEO Solomon;
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 35
b. Tax liens assessed against the C E O Solomon m excess of $1.5 million;
c. C E O Solomon's indebtedness for $200,000 of gambling debt;
d. C E O Solomon's defauh on over $ 190,000 of gambling debt;
e. C E O Solomon's prior bankruptcy filing;
f C E O Solomon's prior fme for attempting to whe money to himself from a client's
account;
g. Multiple lawsuhs against CEO Solomon for fraud;
h. PSI's fmancial condition and operating losses;
i . Failure to disclose accurately and in a not misleading fashion the nature of the C E Mark approval process for the S E S A M E Stent and subsequent abandonment of the S E S A M E Stent commercialization strategy;
j . Cancellation of in-human clinical trials due to inventory mislabeling and subsequent undisclosed delay of trials; and
k. Amount and method of executive compensation PSI would pay Palmaz and Solmon in addition to their equity holdings.
112. Defendants breached their duty of care in failing to enact policies and procedures
reasonably designed to ensure compliance with applicable rules and obligations, including failing
to provide and maintain an adequate supervisory system reasonably designed to ensure
compliance.
113. The representations were made m PPMs and powerpoint presentations to individual
investors for the express purpose of obtaining business funds that would be used to pay, in part,
compensation to Palmaz and Solomon. As a resuh, Defendants representations were made to
individual investors in the course of PSI's business or in a transaction in which the Defendants had
an interest. The information was supplied for the guidance ofthe individual investors in making
investment decisions and the investors reasonably relied upon the representations.
ORIGINAL PETITION AND PLEA IN INTERVENTION - Page 36
114. Defendants' breaches and negligent misrepresentations proximately caused
millions of dollars of harm to individual investors because the investors invested in PSI as a resuh
ofthe statements or omissions.
Count 6: Violations of the Texas Securities Act (As Assignee Against Defendants Palmaz and Solomon)
115. The Trustee incorporates the foregoing allegations and incorporates them by
reference as i f fully set forth herein. The Trustee asserts Count 8 Violations ofthe Texas Securities
Act against Defendants Palmaz and Solomon in his capacity as assignee of individual investors'
claims for misrepresentation.
116. Defendants were offerors and sellers of securities for purposes of Section 33A(2)
of the Texas Securities Act. Each of the facts Defendants withheld, faded to disclose and or
misrepresented as set forth in the foregoing paragraphs are of such a nature that there is a
substantial likelihood that a reasonable investor would consider h important in deciding to invest.
A s such. Defendants omitted material information and/or made affirmative misrepresentations in
the course of offering and selling securities in violation of the Texas Securities Act.
Count 7: Aiding and Abetting Violations ofthe Texas Securities Act (As Assignee Against Defendant Asel)
117. The Trustee incorporates the foregoing allegations and incorporates them by
reference as i f tUUy set torth herem. l he I'rustee asserts Count 9 Aiding and Abetting Violations
of the Texas Securities Act against Defendant Asel in his capacity as assignee of individual
investors' claims for misrepresentation.
118. Defendants Palmaz and Solomon were offerors and sellers of securities for
purposes of Section 33A(2) ofthe Texas Securities Act. Each ofthe facts Defendants withheld.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 37
failed to disclose and or misrepresented as set forth m the foregoing paragraphs are ofsuch a nature
that there is a substantial likelihood that a reasonable investor would consider h important in
deciding to invest. As such. Defendants omitted material information and/or made affirmative
misrepresentations in the course of offering and selling securities in violation of the Texas
Securities Act.
119. Defendant Asel was a material aider and abetter of violations of the Texas
Securities Act. Defendant Asel had, at a minimum, a general awareness (and most likely actual
knowledge) of hs role in the violations. For example, Asel both were generally aware that the
PPMs referenced a filed C E Mark application in 2009 without adequate disclosures conceming the
nature of the approval process or that the financials omitted material financial information
concerning PSFs financial condhion. Asel knew that the PPMs were intended to induce investors
to invest significant funds and that a central business strategy of PSI claimed to be commercializing
the S E S A M E Stent after C E Mark application and approval. Defendant Asel rendered substantial
assistance to Pahnaz and Solomon in assisting in the drafting and preparation of PPMs, powerpoint
presentations and generally advising Palmaz and Solomon conceming investor solichation and/or
the financial state of the company. Defendant Asel acted with reckless disregard and conscious
indifference of the truth of the representations made in the PPMs and, as a resuh, is vicariously
liable for the primary violations of Palmaz and Solomon in selling PSI's securhies.
Count 8: Control Person Liability (As Assignee Against Defendant Palmaz)
120. The Trustee incorporates the foregoing allegations and incorporates them by
reference as i f fully set forth herein. The Trustee asserts Count 10 Control Person Liability against
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 38
Defendants Palmaz in his capacity as assignee of individual investors' claims for
misrepresentation.
121. Defendant Palmaz was in a position to prevent all the violations and conduct
complained of herein. Palmaz exercised either direct or indirect control over Solomon and is,
therefore, jointly and severally liable for the acts of Solomon under Section 33F(1) ofthe Texas
Securities Act. Defendant Palmaz had the power to control and influence each of the individual
investors purchases of securities. Palmaz failed to exercise due care or maintain an adequate
supervisory system reasonably designed to ensure compliance with the Texas Securities Act.
Individual investors were damaged to the extent of their investment losses. Palmaz is jointly and
severally liable as a control person under Section 33F(1) ofthe Texas Securhies Act.
VIII. TOLLING DOCTRINES
122. Plaintiff-intervenor hereby pleads affmuatively the tolling and accrual deferral
doctrines of the discovery rule, concealment and fiduciary duty. The breaches of fiduciary duty,
violations of the Texas Securities Act and negligent misrepresentations set forth above were
inherently undiscoverable but objectively verifiable such that the accrual of any applicable
limhations period has been sufficiently deferred. In the altemative, the breaches of fiduciary duty,
violations of the Texas Securities Act and negligent misrepresentations were concealed from
discovery such that Plaintiff-intervenor was not aware and could not have been aware of the
existence of such torts until such time as he became authorized to investigate the claims and causes
of action belonging to PSI in August, 2016.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 39
IX. SPOLIATION OF EVIDENCE
123. Defendants were aware of potential litigation or claims against PSI by outside
investors or third parties as early as Spring 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 solichation materials. Despite the awareness of
questioning investors, claims to inspect the corporate books and records, and specific evidence
preservation letters, h appears that no safeguards were put in place to protect and preserve the
integrity of either hard copy documentary evidence or electronic evidence. Computers were
allegedly given to Solomon upon his "resignation" from PSI in late July 2015 from the Dallas,
Texas corporate office. No forensic copy or mirror image of those computers was created or
maintained by PSI's directors and officers. Solomon immediately wiped the computers and reset
them to factory defauh settings and then retumed them to PSI a couple of weeks later.
124. 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, desphe a general and specific
awareness of potential or threatened litigation.
125. 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.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 40
X. REOUESTS FOR DISCLOSURE
127. Pursuant to Rule 194 of the Texas Rules of C iv i l Procedure, Plaintiff requests
Defendants to disclose within fifty (50) days of service ofthis request, the information and material
described in Rule 194.
XI. R U L E 193.7 NOTICE
128. Pursuant to Texas Rule of C iv i l Procedure 193.7, Plaintiff-Intervenor intends to
rely upon the authenticity of any document any Defendant produces in discovery.
XIL PRAYER
W H E R E F O R E , PREMISES CONSIDERED, Plaintiff and Intervenor respectfully request
that Defendants be cited to appear and answer herein and that upon ful l and final hearing of this
cause. Plaintiff has judgment of and from the Defendants as follows:
1) For all actual and punhive damages, both past and future, as prayed for herein;
2) For exemplary or punitive damages as allowed by law for the grossly negligent and
reckless conduct and various breaches of fiduciary duty, as prayed for herein;
3) For all of Plaintiff s costs of court;
4) For pre-judgment and post-judgment interest at the highest legal rate and for the longest
period of time allowed by law on all elements of damage claimed herein;
5) For such other and further relief, both general and specific, at law or in equity, to which
this Honorable Court should find Plaintiff to be justly entitled.
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 41
Respectfully submitted,
S O M M E R M A N , M C C A F F I T Y & Q U E S A D A , L . L . P .
/s/ Sean J. McCaffity Andrew B . Sommerman State Bar No. 18842150 Sean J. McCaffi ty State BarNo. 24013122 George (Tex) Quesada State Bar No. 16427750 3811 Turtle Creek Boulevard, Suite 1400 Dallas, Texas 75219 214/720-0720 (Telephone) 214/720-0184 (Facsimile)
A T T O R N E Y S F O R PLAINTIFF
ORIGfNAL PETITION A N D PLEA IN INTERVENTION - Page 42
CERTIFICATE OF SERVICE
I hereby certify by my signature above that a true and correct copy of the foregoing
instrument has been sent to all attomeys of record in the above-styled and numbered matter, said
service being effected in the following manner on the 3rd of March, 2017.
Certified Mail/Retum Receipt Requested
Hand Delivery
Telecopy
Electronically -via E-Filing/E-Service X
Regular Mai l
/s/ Sean J. McCaffity Sean J. McCaffi ty
ORIGINAL PETITION A N D PLEA IN INTERVENTION - Page 43
Claimant Class Shares Share Price
Aggregate
Purchase
Price
Stock
Certlficate(s)
Bradley Hickman Series A-1
Preferred 28,000 25.00 700,000.00 14
Bradley Hickman Series B
Preferred 2,000 250.00 500,000.00 B-27
Bradley Hickman Series A
Preferred 214,592 Conversion 500,000.00 31
Bradley Hickman Jr Series A-1
Preferred 4,000 25.00 100,000.00 17
Clifton Hickman Trust Series A-1
Preferred 4,000 25.00 100,000.00 24
John B Foster Series A
Preferred 858,369 2.33 1,999,999.77 32
John B Foster Series B
Preferred 8,000 250.00 2,000,000.00 B-26
John Patrick Lane (& Margaret) Series A-1
Preferred 2,600 25.00 65,000.00 18
Kathryn Kostohryz Trust Series A-1
Preferred 800 25.00 20,000.00 27
Power of K. LP (Brenda Kostohryz) Series A-1
Preferred 4,000 25.00 100,000.00 23
1 EXI;
1 1
IBIT
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