Former MoviePass executives face fraud charges

By Jennifer KornUpdated: Sun, 06 Nov 2022 17:57:11 GMTSource: CNN BusinessMoviePass's former CEO and the leader of its former parent company have been indicted on securities fraud charges for dec

By Jennifer Korn

Updated: Sun, 06 Nov 2022 17:57:11 GMT

Source: CNN Business

MoviePass's former CEO and the leader of its former parent company have been indicted on securities fraud charges for deceiving investors on the sustainability and profitability of the company's movie-a-day subscription model, according to a Department of Justice release on Friday.

J. Mitchell Lowe, previous CEO of the movie ticket subscription service, and Theodore Farnsworth, former leader of the company's now-defunct parent firm Helios & Matheson Analytics Inc (HMNY), allegedly schemed to defraud MoviePass investors by producing "materially false and misleading representations " of business activities to boost stock prices and attract investors, according to the release.

"As alleged, the defendants deliberately and publicly engaged in a fraudulent scheme designed to falsely bolster their company's stock price," Assistant Director in Charge Michael J. Driscoll of the FBI New York Field Office said in the release. The men each face one count of securities fraud and three counts of wire fraud with a maximum of 20 years in prison. Farnsworth had a first appearance in DC District Court Friday after he voluntarily turned himself in.

Lowe and Farnsworth are accused of lying about the subscription's "unlimited" plan that offered customers the chance to see any number of movies in theaters for a flat monthly fee of $9.95, telling investors that the system was tested, sustainable and able to churn profit or at least break even. Court documents allege that the two men knew these claims to be false and used the plan to boost subscriber numbers and inflate HMNY's stock price while losing money.

Further accusations state that the pair made fraudulent claims surrounding HMNY's technology, using terms like "big data" and "artificial intelligence" to describe the way subscription information was analyzed when no such technology was involved.

The Securities and Exchange Commission filed charges against the former executives in September with similar allegations, and also accused the two men, plus fellow former MoviePass exec Khalid Itum, of creating or approving fake invoices that produced over $310,000 dollars for Itum's personal benefit.

"The indictment repeats the same allegations made by the Securities and Exchange Commission in the Commission's recent complaint filed on September 27th," Chris Bond, a spokesperson for Farnsworth, said in an email to CNN. "As with the SEC filing, Mr. Farnsworth is confident that the facts will demonstrate that he has acted in good faith, and his legal team intends to contest the allegations in the indictment until his vindication is achieved."

MoviePass sent shock waves through Hollywood in 2017, catching fire with consumers with an irresistible offer: $10 to see one movie a day for an entire month. The service rapidly grew to 3 million subscribers in less than a year. But MoviePass' business model was at best unsustainable — and at worst nonexistent. The company burned through cash and shut down two years after bursting on the scene.

After shutting down operations in 2019 and liquidating into bankruptcy in 2020, MoviePass announced its impending return in August after co-founder Stacy Spikes bought the company out of bankruptcy in 2021. Spikes helped found MoviePass before being pushed out in 2018 after selling the company to HMNY. He held a presentation in New York in February, during which he announced the relaunch and acknowledged "a lot of people lost money, a lot of people lost trust" when MoviePass went belly-up, according to Variety.

Spikes had plans to get the service up and running again "on or around September 5th," according to its website, but the site now teases a Chicago launch on November 9th. Details remain scarce, but the company says the new MoviePass will have three pricing tiers that will cost $10, $20 or $30, depending on the market.

CNN's Frank Pallotta contributed to this report.