Federal prosecutors charge ex-CEOs of MoviePass, parent company in alleged fraud scheme
- The former CEOs of MoviePass and its parent company have been charged with fraud, according to the Justice Department.
- The indictment alleges that Theodore Farnsworth and Mitchell Lowe misled investors and were aware that the company's unlimited movie offer was unsustainable at $9.95 per month.
- The former CEOs are 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.
Former executives at MoviePass and its parent company have been charged with fraud, according to a federal indictment that was unsealed Friday.
Theodore Farnsworth, 60, former CEO of Helios & Matheson, and Mitchell Lowe, 70, former CEO of MoviePass, are charged with misleading investors and making false statements about the movie subscription service to boost the stock price of its parent company, Helios & Matheson Analytics.
The indictment alleges that Farnsworth and Lowe in 2017, while describing the company's $9.95 "unlimited" movie plan as thoroughly tested, sustainable and profitable, were aware that MoviePass's offer was a marketing gimmick and that its parent company did not possess the technology or capability to monetize subscriber data.
Nor had the company done the rigorous marketing testing that it claimed to have completed, the Justice Department said.
MoviePass skyrocketed to popularity in 2017 because of its seemingly too-good-to-be-true unlimited movie pass that initially offered customers one movie voucher per day for $30 to $40 a month. The hope was that most subscribers wouldn't actually use the service regularly, in the same way that gyms are able to offset cheap monthly fees because of no-show subscribers.
However, many MoviePass subscribers began to use the service too frequently and the company started to lose money quickly. In an effort to stay afloat, MoviePass began limiting the number of titles available among other restrictions. The service underwent several iterations of price and offerings before shuttering.
Without the backing of movie theaters, which had balked at MoviePass' business model and intrusion into the industry, the company was forced to dismantle in September 2019.
Co-founder Stacy Spikes regained ownership of the company in late 2021, but a new version of MoviePass has yet to make its official debut. The company is currently planning beta tests in several cities including Chicago. The expectation is that the new subscription will offer three pricing tiers for $10, $20 and $30, respectively, with each level having a certain number of credits that can be used towards redeeming movie tickets.
Lowe and Farnsworth do not appear to be connected to the new iteration of MoviePass.
According to the DOJ document, the pair also allegedly knew that the price of MoviePass' unlimited plan would not be enough to offset losses. The plan was to grow new subscribers, inflate Helios & Matheson's stock and attract new investors, the indictment said.
The news of the indictment comes after the Securities and Exchange Commission in September accused Lowe, Farnsworth and another former MoviePass executive, Khalid Itum, of making false statements and falsifying records.
"The indictment repeats the same allegations made by the Securities and Exchange Commission in the Commission's recent complaint filed on September 27th against Mr. Farnsworth, concerning matters that were publicly disclosed nearly three years ago and widely reported by the news media," said Chris Bond, a spokesman for Farnsworth in a statement. "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."
Representatives for Lowe did not immediately respond to request for comment.
On Friday, the Justice Department said Farnsworth and Lowe are alleged to have falsely claimed that the number of tickets MoviePass subscribers were purchasing as part of their subscription was declining over time. Instead, the pair had directed employees to implement tactics to prevent subscribers from using their unlimited service, according to prosecutors.
The former CEOs are 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.