Former MoviePass executives sue for fraud

New York
CNN business

The former CEO of MoviePass and the leader of its former parent company have been indicted on securities fraud charges for misleading investors about the sustainability and profitability of the company’s movie-day subscription model, the Justice Department announced Friday.

J. Mitchell Lowe, the previous CEO of the movie ticket subscription service, and Theodore Farnsworth, former head of the company’s now-defunct parent company Helios & Matheson Analytics Inc ( HMNY ( HMNY ) ), allegedly conspired to defraud MoviePass investors by “materially producing.” According to the notice, false and misleading representations of business activities” to inflate share prices and attract investors.

“As alleged, the defendants intentionally and publicly engaged in a fraudulent scheme designed to falsely promote their company’s stock price,” Assistant Director Michael J. Driscoll of the FBI’s New York Field Office said in the statement. The men face one count of securities fraud and three counts of wire fraud, which carry a maximum sentence of 20 years in prison. Farnsworth made his first appearance in DC District Court on Friday after voluntarily turning himself in.

Lowe and Farnsworth are accused of lying about the “unlimited” subscription plan, which allowed customers to see any movie in theaters for a flat fee of $9.95 a month, telling investors the system was proven, sustainable and profitable. at least profit. Court documents say the two men knew those claims were false and used the scheme to inflate subscriber numbers and inflate HMNY’s stock price while losing money.

Further charges allege the pair made fraudulent claims about HMNY’s technology, using terms like “big data” and “artificial intelligence” to describe the way it analyzed subscription information when no such technology existed.

The Securities and Exchange Commission filed charges against the former executives in September with similar allegations, accusing the two men, and former MoviePass CEO Khalid Itum, of creating or accepting false invoices that generated more than $310,000 for Itum’s personal benefit.

“The complaint reiterates the same allegations made by the Securities and Exchange Commission in the Commission’s most recent complaint filed on September 27,” Farnsworth spokesman Chris Bond told CNN in an email. “As with the SEC filing, Mr. Farnsworth is confident that the facts will demonstrate that he acted in good faith, and his legal team intends to contest the allegations in the indictment until he is vindicated.”

MoviePass sent shockwaves through Hollywood in 2017, catching fire among consumers with an irresistible offer: $10 to see a movie every day for an entire month. The service quickly grew to 3 million subscribers in less than a year. But MoviePass’ business model was unsustainable at best, and non-existent at worst. The company burned through cash and shut down two years after the site exploded.

After shutting down operations in 2019 and filing for bankruptcy in 2020, MoviePass announced in August that it would return after co-founder Stacy Spikes bought the company out of bankruptcy in 2021. Spikes founded MoviePass in 2018 after selling to the company. HMNY. He gave a presentation in New York in February where he announced the reboot and acknowledged that “a lot of people lost money, a lot of people lost confidence” when MoviePass went belly up, according to Variety.

Spikes planned to relaunch the service “on or around September 5th,” according to its website, but the website has put the Chicago launch on November 9th. Details are scarce, but the company says the new MoviePass will have three price tiers that will cost $10, $20, or $30, depending on the market.

CNN’s Frank Pallotta contributed to this report.