DOJ Charges MoviePass Execs With Securities Fraud

From the Justice Department:

An indictment was unsealed today in Miami charging two Florida men for their roles in a scheme to defraud investors of Helios & Matheson Analytics Inc. (HMNY), a publicly traded Florida- and New York-based company that was the parent of MoviePass Inc. (MoviePass).

According to court documents, Theodore Farnsworth, 60, of Miami, and J. Mitchell Lowe, 70, of Miami Beach, allegedly engaged in a scheme to defraud investors through materially false and misleading representations relating to HMNY and MoviePass’s business and operations to artificially inflate the price of HMNY’s stock and attract new investors.

At the time of the alleged fraud, Farnsworth was HMNY’s Chairman and CEO, and Lowe was MoviePass’s CEO.

The indictment alleges Farnsworth and Lowe falsely claimed that MoviePass’s $9.95 “unlimited” plan – in which new subscribers could see “unlimited” movies in theaters with no blackout dates for a flat monthly fee of $9.95 – was tested, sustainable, and would be profitable or break even on subscription fees alone.

Farnsworth and Lowe allegedly knew that the $9.95 “unlimited” plan was a temporary marketing gimmick to grow new subscribers and, in turn, artificially inflate HMNY’s stock price and attract new investors. As a result, MoviePass lost money from the $9.95 “unlimited” plan.

In addition, Farnsworth and Lowe allegedly made false claims that HMNY possessed and used technologies – like “big data” and “artificial intelligence” platforms – to generate revenue by analyzing and monetizing the data MoviePass collected from subscribers.

However, the indictment alleges that Farnsworth and Lowe knew HMNY did not possess these technologies or capabilities to monetize MoviePass’s subscriber data or incorporate these technologies into the MoviePass application.

Farnsworth and Lowe also allegedly made false and misleading representations about the positive impact that multiple revenue streams (other than subscription fees) were having on MoviePass’s profitability and self-sufficiency.

These statements were misleading because, as the indictment alleges, Farnsworth and Lowe knew MoviePass did not have non-subscription revenue streams that would make MoviePass self-sufficient or otherwise offset the losses MoviePass experienced as a result of the unprofitable $9.95 “unlimited” plan.

Farnsworth and Lowe are also alleged to have falsely claimed that MoviePass’s cost of goods, as reflected in the number of tickets each subscriber purchased using their subscription, was naturally declining over time consistent with their stated expectations.

Behind the scenes, Farnsworth and Lowe allegedly directed MoviePass employees to implement numerous tactics to prevent certain subscribers from using the purportedly “unlimited” service for which they had paid to try to ease MoviePass’s cash shortfalls.

Furthermore, Farnsworth and Lowe allegedly made these materially false and misleading representations in press releases, SEC filings, interviews on podcasts and on television, and in print and online media, all of which were intended to reach, and at times did in fact reach, investors and the general public throughout the United States.

Farnsworth and Lowe are each charged with one count of securities fraud and three counts of wire fraud. If convicted, they each face a maximum penalty of 20 years in prison on each count.