While the world is cautiously exploring the new version of MoviePass, the US Department of Justice isn't done with the old one. The agency has charged two former executives with allegedly defrauding investors as part of a scheme to boost the stock price of MoviePass' parent company at the time, HMNY.
The Justice Department's indictment, unsealed Friday, alleges that then-CEO and Chairman of HMNY Theodore Farnsworth along with then-CEO of MoviePass J. Mitchell Lowe knew the service's $10-a-month plan was unprofitable, but publicly said it was "tested, sustainable, and would be profitable or break even on subscription fees alone," to grow subscribers and inflate HMNY's stock price.
They also allegedly misled investors by claiming other revenue streams beyond subscriptions would offset losses and elevate MoviePass into self-sufficiency.
Another claim impacted MoviePass subscribers directly. When both CEOs said that the service's user base was using their passes to buy fewer movie tickets, they allegedly told MoviePass staff to prevent some subscribers from getting "unlimited" tickets.
The CEOs didn't just make these misleading claims to investors, but repeated them in press releases, SEC filings, interviews and podcasts, the complaint alleges. Lowe and Farnsworth were previously scolded by the Federal Trade Commission for misleading customers and intentionally disrupting their ability to use their subscriptions to see films, though the agency didn't force them to do much more than promise not to deceive the public again.
Chris Bond, a spokesman for Farnsworth, says the indictment repeats allegations made by the Securities and Exchange Commission back in September regarding issues that had been publicly disclosed 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," said Bond.
The Justice Department is charging the pair with one count of securities fraud and three counts of wire fraud, which carry a maximum penalty of 20 years in prison for each of the four counts.