Biotech Company CEO and Two Associates Charged with Securities Fraud

BOSTON –The chief executive officer of PixarBio Corp., a Boston-based biotech company, and two associates were arrested today and charged with securities fraud in connection with a scheme to manipulate trading in the company’s shares. 

Frank Reynolds, 55; M. Jay Herod, 51; and Kenneth Stromsland, 45, were charged by criminal complaint with securities fraud. They are scheduled to appear before U.S. District Court Magistrate Judge M. Page Kelley this afternoon.

As alleged in the charging document, beginning in approximately August 2013, PixarBio CEO Reynolds, and two of his associates, Herod and Stromsland, engaged in a scheme to defraud PixarBio investors by making false and misleading statements about the company - its prospects, its financing, and the background and track record of Reynolds - and by engaging in manipulative trading of its shares.  

For example, the complaint alleges that in a December 2015 email and memorandum to potential investors, Reynolds promised investors “a HUGE return on investment (ROI) for any investors in PixarBio’s NeuroRelease.” He told investors: “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.” In reality, the government alleges, PixarBio did not have a market value of one billion dollars, or a product to end “thousands of years of morphine and opiate addiction.” Rather, the complaint alleges, the prospective drug, carbamazepine, is not a treatment for opiate addiction at all, but an existing drug for which PixarBio purported to have developed an additional means of delivery, via injection, in a time-release form. 

The complaint further alleges that, beginning in or about 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 4:00 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.

The charge of securities fraud provides for a sentence of no greater than 20 years in prison, three years of supervised release and a fine of $5 million. Sentences are imposed by a federal district court judge based on the U.S. Sentencing Guidelines and other statutory factors.

United States Attorney Andrew E. Lelling; Harold H. Shaw, Special Agent in Charge of the Federal Bureau of Investigation, Boston Field Division; and Carl W. Hoecker, Inspector General of the U.S. Securities and Exchange Commission Office of Inspector General, made the announcement today. Assistant U.S. Attorney Sara Miron Bloom of Lelling’s Economic Crimes Unit is prosecuting the case.

The details contained in the complaint are allegations. The defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.