Palmaz Scientific Battles Fraud Charges After Bankruptcy Filing

San Antonio, TX-based Palmaz Scientific owes about $20 million to creditors. Now, some of the company's 350 investors are wondering where their money went.

Brian Buntz

Stent pioneer Julio Palmaz, MD recently announced that his medical device surface technologies firm Palmaz Scientific had filed for bankruptcy amidst a "negative campaign of false information." His company had been working on next-generation stents and other implantable devices.

Some investors in the company have complained that they were defrauded by the company. Specific allegations include claims that their investment cash disappeared amidst securities fraud and civil theft. The investors also claimed that the company exaggerated the benefits of one of its stents and that it used fundraising cash for unrelated legal expenses and generous salaries for the companies' management.

The company has retained prominent Houston lawyer Andy Taylor to defend itself. Taylor said that the IRS and the U.S. attorney's office have investigated the charges and could not find wrongdoing.

Taylor was quoted in Express News stating that he thinks there are "a small handful of disgruntled investors throwing the word fraud around very recklessly and cavalierly in court and in the public domain. The company has reached out and hired me to shut that down."

Palmaz Scientific had filed for Chapter 11 bankruptcy protection earlier this month.

Its founder had initially loaned the company about $12.5 million but had decided against loaning the firm any more money.  Making matters worse, the company was unable to raise the required $32.2 million from current investors to keep the company afloat.

A Palmaz unit is currently working on acquiring the assets of the company. "What's happening is that you have alleged fraudsters trying to take assets on the cheap," Dallas attorney Jason Brookner said to U.S. Bankruptcy Judge Craig Gargotta in a hearing last week.

The company had accepted about $3 million loan from the state of Texas that was made in 2010 as part of the Texas Emerging Technology Fund. The money was initially provided as a secured loan but it became unsecured after the money was converted to shared in the company a year later. The company owes the state an additional $1.5 million in interest.

Palmaz Scientific has a sizable patent portfolio and equipment worth roughly $1.8 million.

Earlier, Palmaz sued two prominent law firms--Akin Gump Strauss Hauer & Feld and Baker Botts--for  $10 million in damages and additional punitive damages. That case related to a 2004 arbitration case from San Antonio inventor Christopher Boyle against Palmaz. Palmaz stated that the two firms pressured him into making a 2006 $1.8-million payment and possibly additional licensing payments. Boyle was a former limited partner of a Palmaz Scientific subsidiary who had argued that he wasn't fairly compensated for his contributions to Palmaz Scientific. He sued again in 2010.

An Express News article last year stated that former Kinetic Concepts Inc. CEO Cathy Burzik was set to take over the company. "Cathy Burzik is an operating partner of our venture fund, Targeted Technology Fund II, and it was in this capacity that she led the team that conducted due diligence on Palmaz Scientific in mid-2015 as part of our investment consideration process," says Paul Castella, PhD, senior managing partner Targeted Technology Fund II (San Antonio, TX). "No investment by the fund was made in Palmaz Scientific, though the structure of a potential investment was proposed to the company as part of our ongoing evaluation. This preliminary working proposal, which was considered confidential, was presented to Palmaz shareholders by the company in the form of a letter update. This letter was then leaked to the San Antonio Express News and subsequently published. However, we had decided against making an investment in Palmaz. Accordingly, Cathy's potential role in the business going forward was never enacted."

Castella further stresses that Burzik or Targeted Technology had no role in the business of Palmaz Scientific.

Note: An earlier version of the story stated that after Palmaz left the company, former Kinetic Concepts Inc. CEO Cathy Burzik was put in in charge of Palmaz Scientific.

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