Two former top executives of MoviePass have been charged for fraud by the US Department of Justice, according to court documents. The filing alleges that Ted Farnsworth and Mitch Lowe “engaged in a scheme to defraud investors through materially false and misleading representations relating to HMNY and MoviePass’s business and operations to artificially inflate the price of HMNY’s stock and attract new investors.”
HMNY stands for Helios and Matheson Analytics, the former parent company of MoviePass. Farnsworth and Lowe served as the firm’s CEO’s when it dramatically went under two years ago.
According to the Department of Justice statement on the case, “Farnsworth and Lowe are each charged with one count of securities fraud and three counts of wire fraud. If convicted, they each face a maximum penalty of 20 years in prison on each count.”
Farnsworth surrendered himself to authorities in Washington, DC, on Friday. The two executives are also facing a civil suit filed in September by the Federal Trade Commission alleging, among other things, that MoviePass failed to protect its customers’ personal data.
MoviePass had been founded by Hamef Watt and Stacey Spikes in 2011.
The service allowed subscribers to watch movies in theaters for a monthly fee. In 2017, the company was bought by HMNY, which filed for bankruptcy three years later.
With Farnsworth and Lowe in charge, MoviePass began offering a plan that allowed moviegoers to see a movie a day for a flat fee of $9.95 a month. The move was immediately successful: within just two days the number of subscribers jumped fivefold, from 20,000 to 100,000, and the service had more than 3 million within a year.
The Justice Department indictment alleges that the two executives made false claims about the viability of the $9.95 plan that painted a false picture of the company’s net worth. Specifically, the filing charged Farnsworth and Lowe with crafting “a temporary marketing gimmick to grow new subscribers and, in turn, artificially inflate HMNY’s stock price and attract new investors.” The DOJ further charged that HMNY made false claims about the data platforms—including artificial intelligence–it was using to analyze and monetize the data MoviePass was collecting from its subscribers.
The court documents further allege that Farnsworth and Lowe “directed MoviePass employees to implement numerous tactics to prevent certain subscribers from using the purportedly ‘unlimited’ service for which they had paid to try to ease MoviePass’s cash shortfalls.” The two are also being accused of making “materially false and misleading representations” in SEC filings and in statements to the media.
In defense of Farnsworth, his spokesperson Chris Bond told Insider: “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.”
Lowe’s lawyer did not immediately respond to Insider‘s request for comment.