Biotech CEO Convicted of Securities Fraud and Obstructing SEC Investigation

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Foley Hoag LLP - White Collar Law & Investigations

[author: Ned Melanson, Summer Associate]

The chief executive of a Boston-based biotech company, Frank Reynolds, was convicted of defrauding investors and obstructing an SEC investigation. Reynolds founded the biopharma startup PixarBio Corp. in 2013 and took the company public in 2016. By the next year PixarBio was in a tailspin and an SEC probe was opened. Reynolds is now facing possible jail time and millions in fines after he stoked the brief meteoric rise of PixarBio with promises of ground breaking inventions, inflated valuations, and compelling personal stories.

Reynolds founded PixarBio as a vehicle for developing an opiate-free painkiller. He predicted he would end “thousands of year [sic] of morphine and opiate addiction.” His defense was that he believed the claims he made about his company, but a jury found they were false. He told investors that PixarBio’s marquee drug, NeuroRelease, was on the fast-track for Food and Drug Administration (FDA) approval. He claimed he had dozens of patents. He told investors clinical trials in humans were poised to begin. None of it was true, according to federal authorities.

In a November 2016 securities filing that Reynolds signed as CEO, PixarBio stated that clinical trials were set to begin in “late 2017 and US FDA approvals for the NeuroRelease 14-day product are expected in 2018.” Yet the company’s own managers told Reynolds that the timeline was not realistic. Reynolds also told investors that PixarBio had raised $30 million and was within 2 years of its goal of replacing opiates as painkillers. He then increased this valuation to $40 million and claimed the stock was oversubscribed. In fact, the stock was never oversubscribed and the company had raised less than $10 million.

One of PixarBio’s officers, Kenneth Stromsland testified that Reynolds led investors to believe the company was being courted by Purdue Pharma (maker of OxyContin). Stromsland and another officer, M Jay Herod, pled guilty to fraud earlier this year for assisting Reynolds in deceiving investors.

Even Reynolds’s personal story was sketchy, at best. He claims he was the victim of a horrific accident that left him paralyzed for days and bedridden for over 5 years. But prosecutors argued this too was a lie. A medical malpractice lawyer testified at Reynolds’ trial that he represented Reynolds and won $750,000 in a personal injury lawsuit, but the claim never alleged his client was paralyzed. The lawyer also disputed that Reynolds was bedridden for so long. Reynolds apparently used this narrative to tell a story of inspiration (including a speech at TEDxBoston) that led him to biotech.

By August 2017, PixarBio was running out of cash, cut its staff by more than half, and was evicted from its Medford, MA office. An SEC probe into the company was open by that time.

The downfall of PixarBio and its sensational leader should be a moment of pause for both investors and startups in hot economic sectors like biotech. Promises that sound too good to be true probably are.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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