By Emily Cox
One of three biotech executives facing federal painkiller fraud charges pled guilty Friday to helping a company fraudulently raise roughly $12.7 million by buying stock shares at artificially elevated prices to drive the value higher.
PixarBio Corp.’s Kenneth Stromsland, 46, entered a guilty plea to one count of securities fraud and one count of obstruction of an agency proceeding. Prosecutors indicate that PixarBio CEO Francis M. Reynolds used Stromsland to artificially create market interest in the company by buying stock at the highest price possible. Reynolds also falsely advertised the company’s Neurorelease painkiller system as an end to morphine and opioid addiction.
At Reynold’s direction, Stromsland made numerous purchases of PixarBio stock to defraud investors. He further conspired with Reynolds to lie to the Securities and Exchange Commission (SEC) when it launched its investigation into the Medford, Massachusetts, company in 2017.
“Do you dispute any of that?” District Judge Douglas P. Woodlock asked after the federal prosecutor had finished outlining the charges against Stromsland.
“No, I don’t,” Stromsland replied.
“Is that what happened?” the judge asked.
“Yes, it is,” Stromsland said.
Painkiller Fraud Scheme
Stromsland is the first to own to the painkiller fraud scheme. The SEC estimates that the plot cost at least 200 victims $12.7 million in PixarBio investments. A friend of Reynolds, M. Jay Herod, 51, who also purchased company stock, is also facing painkiller fraud chargers. Reynolds and Herold are each facing securities fraud and manipulative trading allegations. The pair pled not guilty at the initial federal court appearance in April. Stromsland was arrested in New York.
The SEC filed a parallel lawsuit against all three executives and PixarBio in Massachusetts federal court and asked the court to freeze their assets the same say the three were taken into custody.
Stromsland faces up to 20 years in prison on the securities fraud count, as well as another five years for obstruction. The court did not set his sentencing date during Friday’s hearing.
FBI special agent Jennifer Kennan’s affidavit indicates Reynolds made elaborate claims that NeuroRelease would end “thousands of years of morphine and opioid addiction.”
Kennan also said Reynolds emailed investors in December 2015 with claims that his own Reynolds School of Business had developed “the cure for paralysis in humans.”
However, prosecutors say that this was far from the truth. In fact, Keenan and the charging documents indicate that the device was not even ready for clinical trials. Furthermore, Reynolds was not the biotech expert he claimed to be. Contrary to his assertions to investors from 2015 to 2017, Reynolds was not a co-inventor of the spinal support implant, NeuroScaffold. He also claimed to be in the good graces of his former employers. However, InVivo Therapeautics forced him into resignation.
Prosecutors say that the trio began making deceptive trades in late 2016 to simulate market interest and drive stock prices.