PixarBio Chairman and CEO Frank Reynolds and two executives of the company face up to 20 years in prison and fines of up to $5 million following their arrests yesterday on federal fraud charges.

Reynolds, 55, and executives M. Jay Herod, 51, and Kenneth Stromsland, 45, were charged yesterday with securities fraud. According to the U.S. Attorney’s Office for the District of Massachusetts in Boston, the three men engaged in a scheme since August 2013 to defraud PixarBio investors by making false and misleading statements about the company—including its prospects, its financing, and the background and track record of Reynolds—as well as by engaging in manipulative trading of its shares.

In addition to chairman and CEO, Reynolds holds the additional positions of CFO, CSO, and co-founder. Stromsland was until recently PixarBio’s CIO and VP, communications, investor, and public relations. Herod is reportedly a close friend of Reynolds and principal of Jware and a consultant/independent contractor for the past 12 years designing, building, and implementing client/server and/or internet applications for industry groups, according to his LinkedIn profile.

Reynolds, Herod, and Stromsland appeared yesterday before U.S. District Court Magistrate Judge M. Page Kelley, who froze the assets of the CEO and PixarBio at the request of the U.S. Securities and Exchange Commission (SEC). Joshua Hanye, Reynolds’ lawyer, said at the hearing that Reynolds denied the allegations, while Herod’s attorney Leonard Milligan said Herod was not now involved with the company, according to Reuters.

Reynolds earlier this year denied any wrongdoing: “Nothing from the Boston U.S. SEC can stop our success in 2018 and 2019,” he told the Boston Business Journal in February.

But in its complaint, the U.S. Attorney’s Office cited a December 2015 email and memorandum to potential investors, in which Reynolds promised investors “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,” Reynolds told the investors.

Complaint Disputes Claims

In truth, according to the federal complaint, 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. PixarBio did not have a market value of $1 billion, or a product to end “thousands of years of morphine and opiate addiction,” federal prosecutors stated.

The complaint further alleged 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. The trades included overlapping orders to buy and sell PixarBio stock at the same price per share (“matched trading”), small purchases to boost the trading price submitted shortly before trading closed at 4:00 p.m. (“marking the close”), and orders to buy at a price much higher than the price of the preceding market transaction.

Herod shared the proceeds of his trading with Reynolds and PixarBio itself, the federal prosecutors also alleged.

Reynolds previously founded InVivo in 2005 but left in 2013 to join Robert S. Langer, Ph.D., of MIT, and Katrin Holzhaus in co-founding PixarBio. In January 2017, PixarBio offered an initial $77 million in stock for InVivo, which Reynolds would have combined with PixarBio to create Reynolds Therapeutics. The combined company was to have focused on developing the postsurgical pain treatment NeuroRelease™, designed as a nonaddictive, nonopiate morphine replacement, and other neurological treatments.

Later that month, however, PixarBio withdrew its offer “for reasons related to management credibility and competence, corporate governance, and IP control,” Pixar stated at the time.

The companies have long been embroiled in legal disputes over Reynolds’ actions as head of InVivo and over patents related to InVivo’s Neuro-Spinal Scaffold™ technology for acute spinal cord injury.

In February, PixarBio stated in a regulatory filing that it planned to sue InVivo for libel and for rights to the Neuro-Spinal Scaffold patent, after InVivo issued a press release on January 3 that contended: “InVivo has an exclusive license in the field of spinal cord injury to all patents and patent applications in prosecution covering the Neuro-Spinal Scaffold. Frank Reynolds is not an inventor on any of these patents or patent applications.”

PixarBio began over-the-counter trading of shares in October 2016, but trading was suspended two months later by the SEC after it began to investigate the company.

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