BioTech CEO Charged with Securities Fraud, Manipulation

Announcing a new drug can have a significant impact on the share price for a biotech firm. That is particularly true if the drug can revolutionize treatment. Likewise, repeated trading at higher prices shortly before the close of the market can also boost the share price of a stock. The CEO of a biotech firm and his associate were indicted for announcing a revolutionary drug when the firm did not have one and then profiting from matched trades and marking the close. U.S. v. Reynolds, No. 1:18-mj-06151 (D. Mass. Indt. Filed May 22, 2018).

Frank Reynolds is the CEO of PixarBio Corporation, a Boston based biotech firm. Jay Harold is an associate of Mr. Reynolds. Beginning in 2013 the two men engaged in a scheme to mislead investors that would inflate the share price of the firm’s stock. Initially, Mr. Reynolds made false statements about the firm, its prospects and his track record in various corporate documents. Later false statements were made to investors about the prospects of a supposed revolutionary drug. For example, in an email and memorandum for investors in late December 2015, Mr. Reynolds represented that there would be a huge return on investment from PixarBio’s NeuroRelease. The firm’s then billion dollar value would soar as the company replaced morphine. The firm’s value was not a billion dollars. PixarBio did not have a drug which would replace morphine.

The next year Mr. Herod engaged in manipulative trading in PixarBio stock that simulated market interest and artificially boosted the price. To effect this Mr. Herod executed overlapping buy orders — what are called matched orders — and placed small buy orders at increasing prices shortly before the close, otherwise known as marking the close. The trading profits were shared with Mr. Reynolds and the company. Each defendant was indicted on two counts of securities fraud. See also SEC v. Pixarbio Corp., Civil Action No. 1:18-cv-10797 (D. Mass.).