The Securities and Exchange Commission filed suit against two former CEOs of MoviePass, charging them with misleading investors about the bankrupt company’s profit potential, data operations, relationships with studios and revenue sources.
The suit targets former MoviePass CEOs Mitch Lowe and Ted Farnsworth, former chairman and CEO of Helios and Matheson Analytics, which bought out MoviePass in 2017, for making multiple false statements in regulatory filings and media appearances that were collectively designed to convince investors that MoviePass could turn a profit after dropping its subscription rate, in part because it was using “big data”and artificial intelligence to monetize information from subscribers that it was not in fact collecting.
The executives also “devised fraudulent tactics to prevent MoviePass’ heavy users from using the service and falsely and misleadingly informed the public that usage had declined naturally or due to measures the company had employed to combat subscribers’ purported violations of MoviePass’ terms and conditions of service,” the suit claims.
In addition, it names Khalid Itum as a defendant, accusing the former MoviePass vice president of business development of submitting false invoices that Lowe and Farnsworth signed off on, enabling Itum to pocket $310,000.
The suit details the history of the acquisition of MoviePass, noting that Lowe had approved “more than 120 potential investors” because the service was “in desperate need of financing to continue its operations” for at least a year prior to the Helios and Matheson buyout, and was “ready to shut down the business” before the takeover deal materialized.
At the time, a MoviePass subscription cost between $12.95 and $89.95, depending on geographic location, the suit noted. In announcing the buyout, Lowe and Farnsworth also revealed that they were dropping the subscription price to $9.95 across the board, which the SEC cites as Farnsworth’s idea.
“However, Farnsworth and Lowe knew that the $9.95 price was not based on market or subscriber testing, and that, to become profitable, MoviePass eventually would need to raise its subscription price significantly and/or generate significant revenue through advertising and otherwise monetizing the data analytics,” the suit claims.
Meanwhile, Helios and Matheson was selling bonds and other securities to investors, raising about $257 million while Farnsworth and Lowe were making “materially false and misleading public statements regarding MoviePass,” the suit states. It cites multiple media appearances by both executives claiming that the $9.95 price point would allow the company to be profitable “and misleadingly suggested that this key metric was based on rigorous market testing.”
In one case, Lowe said that anyone who thought the prices would have to be raised “don’t understand our business model.” In another, the suit claims, Lowe falsely stated that MoviePass “tested like crazy until we were ready to roll out the $9.95 plan.”
But “at the time Lowe made this statement, he knew that MoviePass had not tested the $9.95 price point,” the suit claims. “Lowe also knew that MoviePass had not determined how to design, let alone implement, a business plan that would allow MoviePass to break even on subscriptions.”
The suit further notes that in March 2018, MoviePass hired a chief product officer, whose main focus was to identify a break-even business model and explore how MoviePass could generate additional revenues outside of subscriptions.
“The Chief Product Officer quit less than six months later, after realizing that MoviePass’s business model would not work,” the suit states. “The Chief Product Officer communicated his views to Lowe.”
The SEC also detailed multiple false statements in filings submitted to the regulator signed by Farnsworth, regarding the company’s capabilities around big data used to analyze consumer trends and artificial intelligence that could be used to make recommendations to users, which the regulator said Farnsworth pitched as part of “our sustainable business model.”
The deception surfaced when Lowe spoke an the Entertainment Finance Forum in March 2018, and boasted about the data collection and customer tracking that MoviePass was doing, then had to issue a statement the following week explaining that he “mischaracterized” the operations and that it did not track subscribers.
The following day, Helios and Matheson stock tanked, and Farnsworth sent Lowe a text message that that investors were “saying the exact thing I was afraid of that we are not a big data company and we just admitted it.”
MoviePass had one final Hail Mary: In March 2018, it announced it would lower the subscription price to $6.95 per month for customers who paid the entire year up front.
The company tried to sell this as a reflection of its rapid growth and ability to pull in revenue from other sources, but the SEC said in the suit that “Farnworth and Lowe knew that the reason for lowering the price was not MoviePass’s ability to generate non-subscription revenue but, rather, its need to receive the full year’s subscription payments up front in order to try to ease its and [Helios and Matheson’s] immediate cash pressures, including MoviePass’s financial obligations to its vendors.”
The suit also claims that Farnsworth set up multiple subsidiaries and acquired MovieFone with the claim that these ventures would generate additional revenue, but the companies made no payments to MoviePass.
Ultimately, MoviePass shut down in September 2019, and the service, along with Helios and Matheson filed for bankruptcy protection in January 2020. Last year, founder Stacy Spikes bought the company out of bankruptcy, and the service relaunched on Labor Day.
The suit, filed in the U.S. District Court for the Southern District of New York, which typically handles securities cases, seeks to prevent Farnsworth and Lowe from serving as an officer or director of a public company in the future, and to claw back “all ill-gotten gains” they received as a result of the alleged violations, along with unspecified civil penalties.
In a statement to TheWrap, Chris Bond, a spokesperson for Ted Farnsworth said, “The complaint concerns matters subject to an investigation that the company and other news outlets publicly disclosed nearly three years ago, and Mr. Farnsworth’s legal team will maintain the challenge to this complaint. Mr. Farnsworth continues to maintain that he has always acted in good faith in the best interests of his companies and shareholders.”