When Alliance Pharmaceuticals ( ALLP) sought an investment bank last year to arrange its controversial $15 million financing plan, the struggling San Diego-based biotech firm decided to keep it all in the family.

Alliance hired Roth Capital Partners, a Southern California-based investment bank that specializes in raising money for small- and micro-cap companies. But Roth Capital is run by two brothers -- CEO Byron Roth and COO/CFO Gordon Roth -- who just happen to be the brothers of Alliance's top management -- CEO Duane Roth and President Theodore Roth.

As reported by TheStreet.com, Alliance's CEO Roth and a director on the company's board were investors in the private placement that sold 30% of the company for just $15 million. The participation of Alliance insiders wasn't disclosed to existing shareholders until after the deal was completed.

The hiring of Roth Capital Partners, with its family connections to Alliance management, raises issues of conflict of interest, experts say. Simply put, were Roth Capital's Byron and Gordon Roth more interested in bailing out their brothers, Duane and Theodore Roth, than in finding a deal to help the company's existing shareholders?

Roth Capital's motivation is muddied further because the investment bank was also the second-largest investor in the private placement, purchasing nearly 1.3 million shares, or 6.6%, of Alliance's common stock, according to a registration statement filed with the Securities and Exchange Commission.

Gordon Roth, by himself, also purchased 20,000 shares of Alliance common stock in the deal.

"It was hardly an arm's-length transaction," says David Miller, editor of the Nymble Biotech Investor, who dropped Alliance from his model portfolio because of the "toxic" financing plan. Because the financing was going to essentially sell the company to a new set of investors -- leaving existing shareholders out -- Alliance's board of directors should have been especially sensitive to rooting out any potential conflicts of interest, he added.

Byron Roth, in an email response to questions, wrote: "The fact that I am the CEO of Roth Capital Partners and have a familial relationship with principals of Alliance had no impact on pricing."

The terms hammered out for the private placement were actually more favorable to Alliance and existing shareholders than is typical in these kinds of deals, added Roth; because Alliance's stock has sunk since the private placement was closed, both old and new investors have been harmed.

Alliance spokeswoman Gwen Rosenberg says choosing the investment bank to handle its deal was in the company's best interest.

"As long as Alliance benefited -- to me, that's what was more important," she says. "We were in a difficult situation at the time, but I don't think you can look at this deal and say that Roth Capital did anything differently than anyone else would have done."

She adds, " Roth Capital was very knowledgeable about the company and that made the interaction with our investors go much more smoothly than if we had to bring in someone new."

Roth Capital Partners' biotech analyst Fariba Ghodsian advised investors to buy Alliance stock late last year, while the financing was under way. He continues to rate the company a buy, even though its stock has dropped to around $1 per share and it's once again running out of cash.

The familial connection between Alliance and Roth Capital Partners is disclosed in Alliance's proxy statement, filed with the Securities and Exchange Commission, although not in the SEC filings that detail the financing plan.

Alliance first turned to Roth Capital Partners for banking and financial services in 1999. The firm acted as Alliance's underwriter in a June 1999 stock offering that earned the bank $1.5 million in fees plus warrants for Alliance common stock. Roth Capital also has earned commissions for putting together a sale of Alliance debt in August 2000, as well as acting as a financial adviser for an acquisition.