PixarBio CEO and 2 Associates Arrested and Charged with Fraud

Arrested

The chief executive officer and two associates of Cambridge, Massachusetts-based PixarBio were arrested yesterday and charged with securities fraud.

Frank Reynolds is listed as chief executive office, chief financial officer, chief scientific officer, chairman and co-founder of the company. Kenneth Stromsland is chief information officer and vice president, investor and public relations. M. Jay Herod’s LinkedIn account identifies him as Principal, Jware, a consultant/independent contractor for client/server and/or internet applications in the Boston area.

PixarBio focuses on developing non-opioid pain medications. According to the company, it is attempting to develop a drug to replace morphine and other opiates, but prosecutors are alleging it is actually an anti-convulsant medication sold as Tegretol (carbamazepine). The company apparently plans to reformulate it as a time-release injection and brand it as NeuroRelease.

Reynolds, Herod and Stromsland appeared before U.S. District Court Magistrate Judge M. Page Kelley yesterday afternoon.

The allegations are that the three men, starting in August 2013, attempted to defraud PixarBio investors via false and misleading statements about the company’s prospects, financing, and Reynold’s background and track record, and that they manipulated stock trading.

One example in the complaint alleges that in a December 2015 email and memorandum to investors, Reynolds promised “a HUGE return on investment (ROI) for any investors in PixarBio’s NeuroRelease…. The value of our portfolio on Wall Street is soaring with excitement around our sales partnership. At only $1,000,000,000 right now, as we prepare to replace morphine in the clinic in late 2017 or early 2018, and we expect our valuation to long-term trend UP.”

The government is alleging that the company never had a market value of $1 billion or a product to end “thousands of years of morphine and opiate addiction.”

Patch writes, “The complaint further alleges that, beginning around November 2016, Stromsland and Herod engaged in manipulative trades in PixarBio stock that simulated market interest in the stock and artificially pushed up the trading price. These trades included overlapping orders to buy and sell PixarBio stock at the same price per share (a manipulative technique known as ‘matched trading’), small purchases to boost the trading price submitted shortly before trading closed at 4 p.m. (a technique known as ‘marking the close’), and orders to buy at a price much higher than the price of the preceding market transaction. The complaint alleges that Herod shared the proceeds of his trading with Reynolds and PixarBio itself.”

Reynolds and Herod were arrested in Massachusetts. Stromsland was arrested in New York. Reynold’s attorney, Joshua Hanye, in court yesterday, denied the allegations. Herod’s attorney, Leonard Milligan, said Herod was not currently involved with the company.

The U.S. Securities and Exchange Commission (SEC) also filed a related lawsuit alleging that PixarBio raised $12.7 million from 211 investors during the course of the scheme. According to Reuters, “All three men were charged with securities fraud. A federal judge meanwhile at the SEC’s request issued an order freezing the assets of PixarBio and Reynolds. Reynolds founded PixarBio after resigning as chief executive of Cambridge, Massachusetts-based biotechnology company InVivo Therapeutics Holdings Corp in 2013.”

In January 2017, Reynolds had the company publish a press release with the Donald Trump-sounding title, “It’s Time to Make US Pharma GREAT Again,” which announced a takeover bid of InVivo for $77 million. Reuters notes, “PixarBio in fact lacked the ability to make the bid, the complaint said, yet a day later announced it had upped its offer to $100 million. The SEC subsequently suspended trading in PixarBio.”

According to the U.S. Justice Department, the men face 20 years in prison, three years of supervised release and fines of $5 million.

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