Bankrupt Texas stent maker accused of defrauding investors in stock sale

Palmaz Scientific founder Julio Palmaz

Things just went from bad to worse for Texas-based med tech Palmaz Scientific. The bankrupt company is already steeped in litigation over claims of defrauding investors. Now, it's accused of misleading shareholders in a stock sale.

In 2011, the San Antonio, TX-based company tapped Jefferies to market and sell $7.5 million of its privately traded shares. But then Palmaz continued to list Jefferies' name in its marketing materials after the broker-dealer severed its ties with the company, The San Antonio Express-News reports. The move gave some investors false confidence and encouraged them to buy.

The Jefferies "name carries a lot of weight in the investment community," investor Toby Wilson, who bought 1,600 preferred shares for $400,000 in 2013, told the newspaper. "When I saw their name on the private placement memorandum, my interest level in the transaction went up significantly."

But when Wilson contacted Jefferies after Palmaz started having more financial problems, Jefferies' lawyer wrote back saying that it wasn't involved with the company. "Palmaz is no longer a client of Jefferies and has not been for years, therefore, we do not possess any information," said Jeff Whyte, Jefferies general counsel, as quoted by the San Antonio Express-News.

Unsurprisingly, Palmaz isn't taking the rap. The company disagrees with its former investment adviser, Palmaz's lawyer, Andy Taylor, told the newspaper. And the company's contract with the investment firm "has never been terminated by Jefferies," Taylor told the newspaper.

The dispute does little to help Palmaz, which is struggling under the weight of legal pushback and SEC investigations. Eight investors have sued the company and its former CEO, Steven Solomon, for fraud and breach of fiduciary duty.

The SEC has also been looking into the company's business practices. The Denver office and other SEC offices including one in Fort Worth, TX, have launched investigations into Palmaz. But the Forth Worth office notified Palmaz last month that it closed the probe without taking any action, the San Antonio Express-News reports.

Meanwhile, the company is dealing with the aftermath of its financial woes. Palmaz filed for Chapter 11 bankruptcy on March 4, and founder Julio Palmaz resigned as the company's chairman before the filing.

The company's assets, including patents for stents and implantable devices, will probably be auctioned off. And if/when they go on the block, Palmaz's wife's company, Vactronix Scientific, could step in with a stalking horse bid, some investors say. The move would then allow the Palmazes to buy the assets at a discount.

- read the San Antonio Express-News story