The U.S. Securities & Exchange Commission this week accused a coterie of lawyers of securities fraud in connection with nearly $1.7 million in illicit stock sales involving PixarBio.

The scheme began in the fall of 2014, the SEC alleged, when Connecticut lawyer Henry Sargent formed a shell company called BMP Holdings and coaxed $1,680 from a group of thirty-two friends, family members and co-workers, selling 168,000 shares of BMP stock at a penny apiece.

“The issuance of BMP stock to the nominee shareholders was a charade. Sargent did not provide the shareholders with any offering materials and did not tell them anything about the business of BMP (it had no ongoing business),” the securities regulator alleged, according to a complaint filed June 27 in the U.S. District Court for Massachusetts.

The charade allegedly continued in May 2015, when Sargent brought in New Jersey attorney Joseph Tomasek to help register a stock offering, “ostensibly so that the nominee shareholders could sell their BMP stock to the public,” according to the SEC complaint. The offering registration was “materially false and misleading because it claimed that the nominee shareholders were not affiliates of BMP and that they had acquired the BMP stock for investment purposes. In reality, the nominee shareholders were controlled by Sargent and had no investment purpose – they were going to sell the BMP stock whenever Sargent told them to do so,” according to the complaint.

Enter PixarBio founder, president & CEO Frank Reynolds, who in April 2016 tapped Patrick Giordano “to help him locate a shell company for PixarBio to acquire and use as a vehicle for unregistered sales of PixarBio stock that would generate illicit funds for the company and for himself,” the suit alleged. When Giordano’s research led him to BMP, he suggested that Reynolds hire New York law partners Frederick Mintz and Alan Fraade as counsel for the acquisition of BMP.

When Sargent dealt his controlling interest in BMP to PixarBio for $325,000 that August, he and Reynolds also arranged for BMP’s shareholders to sell their stock to Sargent, Giordano and PixarBio employee and longtime Reynolds friend Jay Herod. But the BMP stock was restricted from sale to the public, the SEC alleged, meaning that the sale of those shares and their October 2016 conversion to restricted PixarBio stock were illegal.

“To help Giordano and Herod evade the restrictions on selling their PixarBio stock to the public, Mintz and Fraade prepared attorney opinion letters to be sent to PixarBio’s transfer agent and several brokerage firms. The opinion letters falsely claimed that the shares of PixarBio stock held by Giordano and Herod were ‘free-trading’ shares that could be sold to the public without restriction,” the agency alleged.

The ensuing sale of the illicit PixarBio shares “to the unsuspecting public” brought in nearly $1.7 million ($631,000 for Sargent, $117,000 for Giordano and $910,000 for Herod – who allegedly funneled $500,000 to PixarBio and $300,000 to Reynolds).

The SEC wants the Massachusetts federal court to grant a permanent injunction barring further securities violations by the defendants; “disgorgement of the defendants’ ill-gotten gains,” plus pre-judgment interest and civil penalties “due to the egregious nature of the defendants’ violations.” The securities bureau also wants the court to permanently bar the defendants from the penny stock market and seeks a permanent injunction prohibiting Mintz, Fraade, and Tomasek from working as lawyers “in connection with the offer or sale of securities claiming an exemption from the registration provisions of the Securities Act.” Finally the SEC wants the court to force Sargent and Giordano to surrender and cancel all of their PixarBio shares.

Federal authorities arrested Reynolds, Herod and PixarBio CIO Kenneth Stromsland in April 2018 on securities fraud charges, claiming they misled investors about its opioid substitute to raise $12.7 millionand falsely claimed a $1 billion valuation. Reynolds and the company face their own SEC case; Reynolds also faces criminal securities fraud charges stemming from the civil case and is slated to go to trial in October, according to court documents. Herod pleaded guilty in February but has not been sentenced.

PixarBio was purportedly developing a drug to replace morphine and other opiates, but prosecutors alleged that the product is actually an older anti-convulsant called carbamazepine, sold under the trade name Tegretol, that’s used to treat epilepsy and neuralgia; PixarBio planned to re-formulate the drug as a time-release injection called NeuroRelease.

That didn’t stop Reynolds from touting NeuroRelease to investors as the end to “thousands of years of morphine and opiate addiction,” the feds alleged, citing a December 2015 Reynolds email to investors. In that email the former InVivo Therapeutics (NSDQ:NVIV) chief executive pledged “a HUGE return on investment (ROI) for any investors in PixarBio’s NeuroRelease.”