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Bankruptcy case in Austin has ties to Texas technology fund

AUSTIN, Texas —

On the same day that Gov. Greg Abbott declared that taxpayers should stop investing in technology startups, a bankruptcy proceeding in an Austin courtroom was Exhibit A about the perils of investing public money in entrepreneurship.

The cast of characters in this tale, as told in court documents and testimony, includes a company CEO convicted on child pornography charges, a Hollywood producer, a California film library, a state employee who spent her last four months on the public payroll while working as the company CEO for free, and Tom Pickens, the son of Texas billionaire T. Boone Pickens.

The Austin American-Statesman (http://bit.ly/1tLevtB ) reports the younger Pickens is either a white knight who, according to testimony, rushed into the "burning house" that is the startup, or an insider trying to steal the company's technology on the cheap, as the California litigants claim.

Even if the Austin-based company, Image Trends Inc., can be salvaged, Texas taxpayers are unlikely see the return of their original $1 million loan, plus $400,000 in interest, that is unsecured.

But you probably already suspected that. The story is in how.

In 2008, the Texas Emerging Technology Fund loaned $1 million to Image Trends. That loan was later converted to common stock. The company, incorporated in 2005, touted a technology called Black Ice that could scan and digitize old films while curing defects.

Today, Image Trends has $11 million in unsecured debt, mostly in unpaid salaries, and is in litigation with its only major customer, the Sherman Grinberg Film Library, which is in Los Angeles.

Image Trends is down to seven employees, who have worked for little or no money for months, and the company had almost no revenue last year.

Its original CEO, Daniel J. Sullivan, 67, pleaded guilty in April to distribution of child pornography and is serving 10 years in federal prison.

The state's investment in Image Trends predated Terry Chase Hazell's tenure with the emerging tech fund, first as an outside adviser, and then as the fund's executive director on Gov. Rick Perry's staff.

Chase Hazell spent part of two days this week testifying, including being mystified about the 9-year-old company's business plan: "I'm still asking that question."

She testified that last summer her office identified five tech grant recipients, including Image Trends, in need of intense "portfolio management" by the state. But it wasn't clear who could help a cash-starved, leaderless company that, as Chase Hazell testified, "couldn't make a financial statement that made sense."

Chase Hazell said she turned to a network of business associates and political appointees, mostly on the tech fund's advisory board.

"This was a house that was burning that we were trying to get someone interested in," Chase Hazell testified.

Chase Hazell said ShaChelle Manning, a Perry appointee to the state fund, introduced her to Tom Pickens, the CEO of AstroTech. Manning also serves on AstroTech's board.

By September, Pickens and his company team met with Chase Hazell and others. Initially, Pickens was there to advise the state, but testimony indicated that he soon became interested in buying the company.

Pickens didn't testify, but during a courtroom break he said his only association with the state tech fund was repaying a $1.8 million loan to one of his companies, 1st Detect Corp. He denied being an "insider" as alleged by a creditor.

Pickens described himself as a turnaround specialist, who "power washes the mud (off failing companies), looking for sapphires."

Complicating Image Trend's situation were allegations by Steve Blum, owner of the Grinberg film library, that the company had fraudulently misspent $600,000. Blum testified that he advanced Image Trends the money to buy computers and a scanner and to begin digitizing his archives.

Blum testified the equipment wasn't purchased as promised and he had to spend an additional $270,000 for a second scanner. He said little work was done because Image Trend broke off communication in October and didn't provide the necessary pass codes to continue.

By October, Chase Hazell became the sole director and CEO of Image Trends. She said she took no salary from the company while she was being paid by the state. She left the state's payroll on Jan. 20, when Perry's term ended.

Chase Hazell testified that she might eventually be paid a monthly salary if Image Trends is sold, but said she doesn't expect to stay there long. She said she is motivated to try to save the technology.

"It was clear this was a technology that still could be brought to market," she said. "There was still a lot of great stuff there."

To salvage the deal with Image Trends, Blum said he had offered $450,000 for the company but Chase Hazell never responded. He said he is worried that a different buyer wouldn't let the film library use the technology without him paying more money.

"We want the right to use what we bought," Blum said.

Chase Hazell testified the business relationship with Blum had soured over the fraud allegations and what she interpreted as threats to Image Trend's employees.

Meanwhile, Chase Hazell had meetings with Pickens and his AstroTech team. AstroTech provided some interim financing, created a due-diligence file for would-be buyers and potentially reduced the company's debt by $400,000.

"AstroTech held this thing together so someone could buy it," Chase Hazell testified.

Pickens did that by partnering with Hollywood producer Warren Lieberfarb, who invested $400,000 in Image Trends in 2009 and briefly served on the company's board last year.

Lieberfarb, in effect, is willing to forgive $400,000 of unsecured debt for $160,000 secured by the company's assets, according to court documents. He has a third of a new Pickens' company, Astral Images, that is proposing to buy Image Trends. AstroTech's loans, signed by Chase Hazell, also are secured.

The Pickens-Lieberfarb move prompted Blum to file a suit in October, putting Image Trends into involuntary bankruptcy.

Blum alleged in testimony that the deal was essentially a "trick" by Lieberfarb to secure part of his unsecured debt.

Asked if the state's common stock in Image Trends would be wiped out, Chase Hazell said yes. But she said the state could gain jobs and taxes if the company survives and stays in Texas.

On Friday, U.S. Bankruptcy Judge Tony Davis didn't make a final decision. But he took steps to allow Image Trends to begin paying employees and operating expenses again with AstroTech's interim financing until the company can be sold.

He thanked Chase Hazell: "I appreciate the efforts you're putting in for the state."

The judge also ordered that Image Trends be marketed to other bidders, but he acknowledged that Astral Images has the advantage. "That's Astral's reward," he said, "for getting in the door first."

Read more here: http://www.miamiherald.com/news/business/article8864105.html#storylink=cpy