April 24, 2018 / 11:09 PM / a year ago

Biotech CEO, two associates accused by U.S. of securities fraud

BOSTON (Reuters) - The chief executive of a biotech company that said it was developing a non-opiate pain treatment was arrested along with two associates on Tuesday on U.S. charges that he misled investors and participated in a stock manipulation scheme.

Federal prosecutors in Boston said PixarBio Corp (PXRB.PK) CEO Frank Reynolds solicited investors with false and misleading claims that he was a successful inventor with a product that would end “thousands of years of morphine and opioid addiction.”

They said Reynolds, 55, promoted investing in PixarBio with misleading claims about its financial status and progress in seeking U.S. Food and Drug Administration approval for a non-opiate pain treatment called NeuroRelease.

Prosecutors said two of his associates, M. Jay Herod and Kenneth Stromsland, beginning in November 2016 while in close communication with Reynolds made manipulative trades in PixarBio stock to artificially push up its trading price.

Reynolds and Herod, who authorities said was Reynolds’ friend, were arrested in Massachusetts. Stromsland, PixarBio’s vice president of investor relations, was arrested in New York.

Joshua Hanye, Reynolds’ lawyer, at a hearing in Boston federal court said he denies the allegations. Leonard Milligan, Herod’s lawyer, said he has no current involvement with PixarBio. Stromsland’s attorney could not be identified.

The U.S. Securities and Exchange Commission filed a related lawsuit that said PixarBio raised $12.7 million from 211 investors during the scheme.

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 (NVIV.O) in 2013.

According to the criminal complaint, Reynolds in a 2015 email to potential investors claimed PixarBio had a $1 billion valuation that was expected to increase as “we prepare to replace morphine in the clinic in late 2017 or early 2018.”

In reality, PixarBio was never worth $1 billion and had not even finished the work required to seek permission to conduct human drug trials, the complaint said.

In January 2017, at Reynolds’ direction, PixarBio issued a press release entitled “It’s Time to Make US Pharma GREAT Again,” announcing a $77 million takeover bid for Invivo, the complaint said.

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.

Reporting by Nate Raymond in Boston; Editing by Matthew Lewis

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