Mitch Lowe and Ted Farnsworth already settled with the FTC over fraudulent activity affecting MoviePass customers, and are being sued by the SEC, but now the former heads of MoviePass and its parent company, Helios and Matheson Analytics (HMNY), are facing criminal allegations of securities fraud and wire fraud.
The Department of Justice announced the charges today, saying false statements made by both men defrauded investors in HMNY when the execs pretended like the company’s money-losing $9.95 “unlimited” moviegoing plan had any hope of profitability.
Chris Bond, a spokesperson for Farnsworth, said in a statement emailed to The Verge that “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. 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, although it had been around since 2011, generated national headlines in August 2017 when it lowered the price of its all-you-can-watch movie ticket subscription service to an astounding $9.95 a month.
The plan was hatched by CEO Mitch Lowe, a former Netflix executive who joined MoviePass in 2016. In many cases, seeing even one movie per month was enough to cover the cost of the subscription fee in many urban markets. Within months, MoviePass had signed up 1 million new subscribers.
For MoviePass, however, the business model was full of holes. For every ticket a user secured through its mobile app for effectively zero dollars, MoviePass had to cover the cost in full. It did so by issuing independent debit cards to subscribers, which pulled funds directly from a MoviePass-owned bank account.
In short order, the subscription revenue MoviePass was generating was dwarfed by its monthly movie ticket costs. Although MoviePass raised nearly $70 million in venture capital, it was not enough to stem the bleeding.
For more on the entire episode, read Why MoviePass really failed.
HMNY’s own auditor cast doubt on the company’s viability in a report in 2018, but at the time, Farnsworth downplayed the advisory, telling Insider that “pretty much most” companies running at a loss would have a similar warning.
But the big problem is his claims that HMNY’s analytics prowess could somehow monetize data generated from MoviePass simply didn’t hold up: prosecutors now allege “Farnsworth and Lowe knew HMNY did not possess these technologies or capabilities to monetize MoviePass’s subscriber data or incorporate these technologies into the MoviePass application.”
Here are a few other allegations toward Farnsworth and Lowe from the press release announcing the charges:
That they falsely claimed MoviePass’s $9.95 “unlimited” plan was tested, sustainable, and would be profitable or break even on subscription fees alone.
That Farnsworth and Lowe knew MoviePass did not have non-subscription revenue streams that would make MoviePass self-sufficient or otherwise offset its losses.
Falsely claiming that MoviePass’s cost of goods was naturally declining over time as they expected.
That they allegedly directed MoviePass employees to implement numerous tactics to prevent certain subscribers from using the supposedly “unlimited” service.
The DOJ says each man is facing one count of securities fraud and three counts of wire fraud over the lies they allegedly told in “press releases, SEC filings, interviews on podcasts and on television, and in print and online media.”
MoviePass eventually shut down at the end of 2019 but is now relaunching with its original co-founder, Stacy Spikes (not named in today’s charges), who had sold a majority stake in the company to HMNY before buying it back in 2021. According to the site for the MoviePass 2.0 beta, invites will go out to people on the Chicago waitlist starting next week as it relaunches the service with three pricing tiers: $10, $20, and $30. Wisely, there’s no promise of unlimited movie viewing in the new service: “Each level will get a certain amount of credits to be able to use towards movies each month.”
Update 6:50PM ET: Added statement on behalf of Ted Farnsworth.