2017 3:17:27 PM FELICIA PITRE DISTRICT CLERK Tonya Pointer 3.pdf · FELICIA PITRE DISTRICT CLERK...

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


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.


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


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


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.


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


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.


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


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.


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


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.


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.


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


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


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


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.


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


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


("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


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


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


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


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


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


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


Count 3: Breach of Fiduciary Duty Against Officers (Against Defendants Solomon)

101. The Tmstee incorporates the foregoing allegations and incorporates them by



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


concem value of the enterprise as a properly run company, and the amount of excessive


Count 4: Aiding and Abetting Breach of Fiduciary Duty (Against Defendants Asel)

106. The Tmstee incorporates the foregoing aUegations and incorporates them by


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)


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;


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.


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)


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)


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.


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)


reference as i f fully set forth herein. The Trustee asserts Count 10 Control Person Liability against


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.


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.


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.


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


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

amer

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