HemCon Medical Technologies was once one of Oregon's rare biotech successes. 

The Portland-based company won worldwide fame for its innovative bandages that use a substance found in shrimp shells to stop bleeding. Members of Congress steered millions to help the company develop its products, and HemCon's dressings were praised by battlefield medics for the ability to save lives.

"It's advances like this," a CNN reporter said of HemCon's products in 2006, "that are a big reason more U.S. troops are surviving serious wounds in Iraq, than in any previous war."

HemCon saw an even bigger market: selling the war-tested bandages to consumers, an opportunity that seemed unlimited.

That all changed in April, when the company plummeted into Chapter 11 bankruptcy court like a sky diver with a torn parachute.

The bankruptcy wiped out the value of millions of shares, many held by prominent local investors. Now court records and once-private documents—including a blistering letter from a shareholder—provide a rare look into the pivotal events and raw emotions that sent the once-promising company into free fall. 

Taxpayers are on the hook for HemCon's failure, too. The U.S. Department of Defense contributed tens of millions of dollars to the development of HemCon's technologies, some of which were undergoing trials when the company declared bankruptcy. Documents also show the company ended 2011 owing an estimated $483,000 in state and federal income taxes.

"The bankruptcy filing was forced by the need to reduce amounts owed to creditors," HemCon president Nick Hart wrote to shareholders in the private Portland company on July 3.

"We found that the only way to do this was to cancel existing stock. Your HemCon stock will therefore no longer represent an interest in HemCon.” 

That communication infuriated Portland divorce lawyer Jody Stahancyk, who, along with family members, bought nearly 30 percent of the first round of shares HemCon sold to private investors, records show.

"You each deserve a special place in hell for not facing the shareholders who invested in you," Stahancyk, 64, wrote to HemCon's board members and founders on July 5. "When the patient [HemCon] died, each of you Board Members should have signed the letter and made personal calls to shareholders. Your failure to be personally accountable speaks volumes of each of your lack of personal character."

Co-founded in 2001 by Dr. Kenton Gregory, a Portland cardiologist and serial entrepreneur, HemCon had a great story—its revolutionary bandage, manufactured in Oregon from shrimp shells, stopped bleeding cold.

"Between 2003 and 2008, the bandage was the standard-issue hemorrhage-control bandage for all U.S. Army soldiers and is credited with saving hundreds of lives on the battlefield," the company said in a July 2 court filing.

The seeming permanence of war magnified the promise of HemCon's technology. The U.S. Department of Defense spent tens of millions of dollars to help HemCon develop a process for incorporating chitosan—a substance found in shrimp shells—into bandages that control severe bleeding and, the company says in court filings, are naturally antibacterial.

Gregory, 57, and his co-founder, Dr. William Wiesmann, a Maryland medical entrepreneur, convinced numerous wealthy investors to back their company. Court filings read like a who's who of Oregon businesspeople, including Howard Hedinger, president of American Steel; Andrew Miller, chief executive of Stimson Lumber and one of Oregon's largest political contributors; financier Eli Morgan; and former barge line owner Peter Brix.

Only a year after the company began operations, and with wars escalating in Iraq and Afghanistan, HemCon won a U.S. Army contract. The federal Food and Drug Administration approved the company's bandages in 48 hours, which HemCon boasted was the "second fastest approval in FDA history."

The Army loved the bandages—but not everyone else did.

A 2005 investigation by The Baltimore Sun reported that HemCom bandages, after $29 million in Defense Department grants, weren't nearly as effective as advertised. While the U.S. Army praised the dressings, the newspaper said, studies by the Navy found the bandages were only slightly more effective than gauze. The Navy, U.S. Marine Corps and U.S. Air Force rejected HemCon's products, at $89 per bandage, in favor of an anti-bleeding treatment that cost about $9 each.

Still, the Army kept buying HemCon's products, reaching $35.4 million in sales in 2008.

Then disaster struck.

In 2008, the Army switched to a HemCon competitor. By last year, HemCon's sales to the Army had slipped to a paltry $600,000. 

Competition wasn't HemCon's only problem.

It also borrowed $37 million in 2008 to buy an Irish company called Alltracel Pharmaceuticals PLC. Management in Oregon struggled to integrate that acquisition as sales plunged. 

Soon HemCon faced another—ultimately fatal—challenge, this time in court. 

In 2010, a federal jury in New Hampshire ruled HemCon had infringed on a competitor's chitosan patent and awarded that competitor $30 million in damages.

HemCon appealed, but the award was upheld this March—and that drove HemCon into bankruptcy. 

For all its early promise, the company in bankruptcy showed assets of just $7 million and debts of $62 million. 

In her letter, Stahancyk (who represented Gregory in a 1995 divorce) accused founders of failing to exercise control over HemCon.

"The company failed because the board failed to do their job," Stahancyk wrote. "Corporate opportunities were diverted to another company owned by you at a time when you knew or should have known that HemCon was in terrible trouble and in danger of failing.” 

Stahancyk also accuses the founders of putting their interests ahead of other shareholders'. 

"You, Kenton and Bill, sold founders shares for $8 a share without ever offering all of the preferred shareholders the option to do the same," she wrote.

Records show the Stahancyks' holdings were worth $1.18 million when the stock was worth $8 per share.

Stahancyk did not give WW her letter and declined to comment on it.

"The letter speaks for itself," she says.

Wiesmann did not return a call seeking comment. 

Miller, the investor, defended his colleagues on HemCon's board as well as the founders. "Everything the company and its founders did was fully disclosed and well documented," Miller tells WW.

Gregory and Wiesmann "many times brought other business opportunities to the company," Miller says. "They did their duty."

To be fair to the founders, they owned a collective 44 percent of the company when it went bust, seeing an ownership stake once worth $27.6 million dwindle to being worth no more than a basket of shrimp shells. 

Gregory says he regrets that shareholders lost money. 

"We all wish that the lifesaving technologies that were created by HemCon would have translated into a reward for the investors and others that have worked very hard for this company,” he told WW via email. 

But Gregory denies founders diverted assets.

"I am an entrepreneur and have started several companies over the years, including HemCon," Gregory says. "At various times I have brought potential business opportunities to HemCon. Some opportunities fit the business strategy and some didn't. The HemCon CEO made the final determination of whether to pursue these partnerships."

Gregory also says his sale of founders' shares was aboveboard.

"The sales were permitted under an agreement with the preferred shareholders," he says. "This was a fundraising strategy that the private equity firm advocated and the company followed. It is all well documented."

David Foraker, the attorney representing HemCon's creditors in bankruptcy court, says he's unaware of any inappropriate actions on the part of the company's founders or board.

HemCon will remain in bankruptcy until it can work out an agreement with clients, but it currently plans to sell about $10 million worth of new equity and continue pursuing a share of the bandage market. 

One investor unlikely to buy any stock in the reorganized company? Stahancyk, who in her scathing email reminded Gregory about her work as his divorce attorney.

"Kenton, you came to me and asked me to risk for you," she wrote. "You promised to take the same kind of care of my investment that I took care of your children during your family crisis.

"In fact, had I made the choices you did, your children would be roadkill. I would have had my secretary send a letter over a holiday weekend letting you know you had lost custody of your children, while having collected a big fat fee.”