SEC Charges Biotech Start-up, CEO With Fraud
Litigation Release No. 24121 / April 24, 2018
Securities and Exchange Commission v. PixarBio Corp. et al., No. 1:18-cv-10797 (D. Mass. April 24, 2018)
United States v. Frank Reynolds et al., No. 1:18-mj-06151 (D. Mass. April 24, 2018)
The Securities and Exchange Commission today charged a biotech start-up formerly based in Massachusetts, its CEO, and another employee with lying about their progress in seeking FDA approval for a non-opiate pain treatment and with lying about the company's finances. The SEC also alleges that the insiders along with the CEO's close friend manipulated the company's publicly trading stock, and the CEO and his friend kept about $400,000 for themselves.
As alleged in the SEC's complaint, PixarBio Corporation, its founder and CEO Frank Reynolds, and employee Kenneth Stromsland misled investors with false claims about PixarBio's progress in developing "NeuroRelease," a purported method of delivering non-opiate, post-operative pain medication. From December 2015 to the present, the defendants are alleged to have falsely told investors that the FDA had lowered PixarBio's hurdles for regulatory approval. They are also charged with misleading investors about the amount of money PixarBio had raised and about a phony takeover bid of a company that Reynolds had previously led. According to the complaint, the defendants raised about $12.7 million from about 211 investors in an unregistered offering.
The SEC's complaint also alleges that from about July 2016 to January 2017, Reynolds, his close friend M. Jay Herod, and Stromsland engaged in a fraudulent scheme to acquire and merge PixarBio with a publicly traded company and to secretly manipulate the sales of shares in the new entity. From these sales, Reynolds and Herod pocketed about $400,000, and they used an additional $500,000 to keep PixarBio afloat as Reynolds misled investors about how much money they had raised in the unregistered offering. The defendants are also charged with violating the registration requirements for securities offerings, while Reynolds and Stromsland are charged with selling securities without being registered as a broker or dealer. Investors can quickly check whether people selling investments are registered by using the SEC's Investor.gov website.
The SEC charges each of the defendants with violating the anti-fraud and registration provisions of the securities laws, Herod and Stromsland with stock manipulation, and Reynolds and Stromsland with acting as unregistered broker-dealers. The SEC's complaint seeks a permanent injunction, the return of allegedly ill-gotten gains plus interest, a penalty, and industry and penny stock bars. The SEC also seeks a court order to immediately freeze the assets of PixarBio and Reynolds and to prohibit each of the defendants from soliciting money from investors.
The U.S. Attorney's Office for the District of Massachusetts today announced parallel criminal charges against Reynolds, Herod, and Stromsland.
The SEC's case is being handled by Jonathan Allen, Sofia Hussain, Frank Huntington, and Amy Gwiazda of the Boston office and was assisted by Robert Nesbitt in the SEC's Washington, D.C. Office of Market Intelligence.