The Department of Justice (DOJ) announced the unsealing of an indictment late last week naming two C-suite executives with the publicly traded but now bankrupt company Helios & Matheson Analytics Inc. (HMNY) and its subsidiary MoviePass Inc., and charging them with wire and securities fraud.
The DOJ accused the two Floridians, Theodore Farnsworth, 60, and J. Mitchell Lowe, 70, of defrauding investors through a scheme to make HMNY’s MoviePass business and operations look more profitable and viable than they actually were between 2017 and 2019. The criminal case dovetails with a suit filed by the Securities and Exchange Commission in September over related conduct.
According to the agency, MoviePass offered consumers the ability to watch unlimited movies per day, in-person, at American cinemas in exchange for a monthly fee of $9.95 without blackout dates. Reportedly, Farsworth and Lowe represented that the model was “tested, sustainable, and would be profitable or break even on subscription fees alone.” However, the DOJ alleges that the pair knew that the unlimited plan was a financial bust, as it indeed was, but instead used the ploy as a marketing technique to attract new investors and artificially buoy HMNY’s stock.
The indictment points to several actions the defendants took in violation of investor trust and fraud provisions, including that the company made claims about its “big data” and “artificial intelligence” technologies to churn revenue by analyzing and monetizing the data MoviePass collected from subscribers. Yet, when it neither had nor employed those technologies, the DOJ said.
The pair also made false representations about the positive impact multiple revenue streams were having on MoviePass’s profitability and self-sufficiency. The DOJ says that there were no other revenue streams, rendering the statements inaccurate.
As brought to light in a 2021 Federal Trade Commission (FTC) action, Farnsworth and Lowe allegedly instructed MoviePass employees to prevent certain subscribers from using the purportedly unlimited service to ease MoviePass’s cash shortfalls. According to the FTC, employees illegitimately invalidated members’ passwords and launched a ticket verification program with the intent of discouraging movie attendance.
In the criminal case, Farnsworth and Lowe have each been charged with one count of securities fraud and three counts of wire fraud, carrying a maximum penalty of 20 years in prison for each count.