MoviePass was founded on a lie, the Securities and Exchange Commission alleged in a complaint filed on Monday night.
The company introduced its $9.95-a-month, all-you-can-watch subscription plan in August 2017. According to the complaint, executives Theodore Farnsworth and Mitch Lowe knew that the offer was just a “marketing gimmick” and that the price was unsustainably low.
But in public, they claimed that they had done rigorous market testing and determined they could turn a profit. In fact, they had done no testing, the SEC said. Asked by Variety if the company would eventually have to raise its prices, Farnsworth said, “The answer is no.” Critics, he went on, “don’t understand our business model.”
Helios and Matheson Analytics, the parent company of MoviePass, would go bankrupt after burning through hundreds of millions of dollars. According to the SEC, Farnsworth and Lowe repeatedly lied to the public about the MoviePass business model and then, as losses mounted, devised fraudulent methods to try to staunch the bleeding.
In April 2018, Farnsworth told Variety that the company was not running out of money, and that he was in fact sitting on “hundreds of millions of dollars of dry powder.”
“This is a unicorn company,” he declared.
But the prior week, his own CFO had told him: “Something has to change, we really need to curtail spending and usage. I know I am stating the obvious… We cannot survive at this level of burn.”
The SEC accused Lowe and Farnsworth of violating securities laws and of profiting from their alleged fraud. The agency also charged that Khalid Itum, a MoviePass executive, submitted false invoices to the company and obtained more than $310,000 for his personal benefit.
A spokesperson for Farnsworth, Chris Bond, said in a statement that he will continue to fight the charges.
“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,” Bond said. “Mr. Farnsworth continues to maintain that he has always acted in good faith in the best interests of his companies and shareholders.”
According to the complaint, Farnsworth and Lowe tried to slow the cash burn at the company by restricting access to certain films and to certain AMC theaters. In January 2018, Lowe told his staff to block access to six Bollywood films because they were “killing us financially,” the complaint alleges.
In April 2018, the company initiated “Project 2%,” which was intended to curb the heaviest users from going to movies, the complaint states. Employees were instructed to subject the heavy users to “password disruption” and “ticket verification” under the guise of a fraud protection measure.
The complaint also states that Itum, who was VP of business development, use his own personal company, Kaleidoscope, to put on events for MoviePass at the Sundance Film Festival and at the Coachella Music Festival in 2018. According to the SEC, Itum then invoiced MoviePass and was able to siphon funds from the company for his personal use.
The SEC alleged that at one point, Farnsworth instructed Lowe to pay Itum a $150,000 “bonus,” because Itum needed money to pay a personal debt. The “bonus” was described in the MoviePass books as “MP consulting – outside services,” according to the complaint.
MoviePass recently announced that it would relaunch under new management and with a new business model. The latest incarnation will included tiered prices and a waitlist.
The SEC complaint was filed in the Southern District of New York.
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