SEC sues former MoviePass executives for alleged fraud and misleading investors

The U.S Securities and Exchange Commission filed a lawsuit against former executives of the controversial cinema subscription service MoviePass, alleging they made fraudulent statements about the business.

The market regulator said that for more than two years, Theodore Farnsworth and former Netflix executive Mitchell Lowe, who were CEOs of Helios and Matheson Analystics and MoviePass, respectively, “intentionally and repeatedly” disseminated materially false or misleading statements about the business, according to a filing with the U.S. District Court in New York on Monday.

“Farnsworth and Lowe devised fraudulent tactics to prevent MoviePass’s 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’s terms and conditions of service,” the SEC said in its filing. Farnsworth was not immediately available for comment.

“We disagree with the SEC’s characterization of Mitch’s conduct, including allegations about statements made about the progress in building MoviePass,” Lowe’s attorney said in a statement. “Bringing new commercial concepts to the market can be disruptive and uneven. Mitch remains proud of what was accomplished at MoviePass and intends to work within the legal process to resolve these allegations.”

Chris Bond, a spokesperson for Farnsworth, said his attorneys will challenge the complaint. “Mr. Farnsworth continues to maintain that he has always acted in good faith in the best interests of his companies and shareholders,” Bond said.

The meteoric rise and collapse of MoviePass sucked in consumers and cinema circuits. Its controversial, too-good-to-be-true promises of all-you-can-watch movies for less than $10 a month ultimately collapsed.

Although the New York-based service vowed to revolutionize Hollywood by offering steep discounts on movie tickets, it filed for bankruptcy in 2020 with debts of nearly $300 million.

In its lawsuit, the SEC also said MoviePass executives approved false invoices from Khalid Itum, its executive vice president, who profited more than $310,000 from the company. Itum was responsible for day-to-day operations and resigned from MoviePass in March 2019.

An attorney for Itum said in a statement: ““Khalid Itum has been unfairly targeted by the SEC in this complaint. Khalid is proud of the character and integrity he displayed throughout his time at MoviePass, and we look forward to challenging the SEC’s meritless allegations against him in court.”

The SEC is seeking a judgment to compel MoviePass to return ill-gotten gains from the alleged violations and permanently bar the executives from serving as officers or directors of any SEC-registered company.

Farnsworth, 60, and Lowe, 72. are residents of Miami and Miami Beach, Florida, respectively. Itum, 42, is a L.A. resident, according to the filing.

MoviePass promised users they could see a certain number of movies every month for a fixed fee. They were issued a debit card from MoviePass that would be credited with the funds to buy a ticket for a specific movie selected through the MoviePass app. At one point, MoviePass told subscribers, they could see “any movie; any theater; any day” for $9.95 per month.

Helios and Matheson (HMNY) acquired MoviePass in 2017. After the takeover, HMNY issued $160 million in convertible notes, and later another $97 million in a public offering of warrants used to finance the investments in the company. The SEC said these offerings coincided with false statements by Farnsworth and Lowe.

“Despite knowing that the $9.95 subscription price had to be a temporary, unprofitable measure, Farnsworth and Lowe publicly claimed that it would allow MoviePass to turn a profit and misleadingly suggested that this key metric was based on rigorous market testing,” the SEC said.

The SEC also said that the duo were claiming that MoviePass had a trove of valuable data when it was not collecting basic demographic information for all its subscribers.

Overwhelmed by demand from movie fans in 2018, MoviePass removed films from its app that it expected to be popular, in a bid to reduce cash burn, the SEC said. It also blocked 10 AMC theaters from its app, the regulator said. “Lowe and Farnsworth thereafter made misleading public statements to the effect that MoviePass had blocked the AMC theaters because AMC would not work with MoviePass,” it said.

Both executives profited from their misconduct, by receiving bonus payments and other compensation, the regulator alleged.