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Theodore Farnsworth, the former CEO of MoviePass parent Helios & Matheson Analytics, pleaded guilty to charges of defrauding and conspiring to defraud investors in two public companies, including lying about artificial intelligence capabilities that it didn’t have.
The company is now owned and run by original founder Stacy Spikes, who acquired it out of bankruptcy in 2022 after Farnsworth and partner Mitch Lowe ran it to the ground, wiping out shareholders.
Farnswoth entered the plea in the Southern District of Florida.
According to the Department of Justice, the executive and and co-conspirators made materially false and misleading representations relating the Helios & Matheson and MoviePass business and operations from August 2017 through March 2019 to artificially inflate Helios stock and attract new investors. Farnsworth, chairman and CEO at the time, “repeatedly lied to the public to artificially inflate these companies’ stock prices, defraud investors, and enrich himself and his co-conspirators,” said Principal Deputy Assistant Attorney General Brent S. Wible, head of the Justice Department’s Criminal Division.
“He concealed that MoviePass’ subscription model was a money-losing gimmick and falsely claimed that HMNY used artificial intelligence to monetize MoviePass’ subscriber data, among other misrepresentations. The Criminal Division is committed to protecting investors from criminals who engage in fraudulent schemes, including those that employ AI washing.”
“Theodore Farnsworth’s plans and promises for MoviePass seemed too good to be true — they were in fact part of a securities fraud scheme,” said Assistant Director in Charge James E. Dennehy of the FBI New York Field Office.
“As he admitted today, Farnsworth’s ploys and boasts were actually lies and misrepresentations designed to boost stock prices. The FBI will continue to ensure anyone attempting to commit fraudulent schemes at the expense of investors is held accountable in the criminal justice system.”
MoviePass was a privately held company that offered subscribers a certain number of movie tickets per month at a flat monthly fee. HMNY acquired a majority ownership interest in MoviePass, after which MoviePass introduced a new unlimited plan that purported to allow new subscribers to see unlimited movies in theaters with no blackout dates for a flat monthly fee of $9.95. Farnsworth and his co-conspirators falsely claimed the MoviePass’ unlimited plan was tested, sustainable and would be profitable or break even on subscription fees. However, he knew, instead, that it was a temporary marketing gimmick to attract new subscribers and, in turn, to artificially inflate HMNY’s stock price and attract new investors.
It was no surprise in fact when MoviePass lost money from the plan.
Farnsworth had also falsely claimed that Helios & Matheson possessed and used technologies — such as “big data” and “artificial intelligence” capabilities — to generate revenue by analyzing and monetizing the data MoviePass collected from subscribers. But Farnsworth knew it did not possess these capabilities or technologies.
The charges in this case, originally brought in 2022, represent one of the Criminal Division’s first “AI washing” cases.
Additionally, Farnsworth falsely claimed that MoviePass’ cost of goods, as reflected in the number of tickets each subscriber purchased using their subscription, was naturally declining over time consistent with publicly stated expectations. In fact, Farnsworth and his co-conspirators directed MoviePass employees to implement numerous tactics to prevent certain subscribers from using the purportedly “unlimited” service to try to ease MoviePass’ cash shortfalls. These tactics included directing MoviePass employees to “throttle” subscribers who most frequently used the service to buy movie tickets, thereby inhibiting their ability to use the MoviePass service.
Farnsworth pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud. He faces a maximum penalty of 20 years in prison on the securities fraud count and five years in prison on the conspiracy to commit securities fraud count.
The sentencing hearing has not yet been scheduled.
The other company in the case was Vinco Ventures.
