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Facepalm: The leaders responsible for the MoviePass password scandal are again in the US government's crosshairs. The executives had already settled a case brought by the FTC in June 2012. However, now the SEC wants its pound of flesh. If a judge sees fit, two former MoviePass execs could face hefty fines and be permanently banned from holding high-ranking positions in any SEC-registered companies.
The US Securities and Exchange Commission (SEC) is suing three former MoviePass executives for fraud. The SEC alleges that Theodore Farnsworth and Mitch Lowe misled investors when selling them on the MoviePass business model using false information. A third exec, Khalid Itum, is accused of taking $310,000 from the company using false invoices.
Lowe led MoviePass as CEO from 2016 to 2020. Farnsworth worked as chief executive for Helios and Matheson Analytics, the parent company of MoviePass, from 2017 to 2020, when the company filed for Chapter 7. During their tenures, the SEC claims they both "intentionally" shared false information about the business "repeatedly."
From 2016 to 2018, MoviePass did well, growing subscribers to over three million under Lowe's watch. However, this considerable customer base caused the company to hemorrhage funds. So in July 2018, Lowe ordered employees to change the passwords of the most significant users of the service. Farnsworth, Lowe, and Helios agreed to a consent order involving a Federal Trade Commission complaint regarding the shady password scandal in 2021.
However, the federal government wasn't done doling out the spankings. The SEC complaint filed on Monday says that Farnsworth and Lowe scammed investors by lying about the company's profitability after Helios bought the business.
Before Helios entered the picture, unlimited subscriptions ran about $40-$50 per month. After the acquisition, Farnsworth and Lowe told investors that MoviePass could still turn a profit under a $9.95 per month business model. This claim was patently false and created a negative cash flow situation that persisted until Helios had to file for bankruptcy.
The complaint reads:
"Faced with debilitating negative cash flows – rather than tell the public the truth – 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's lawsuit seeks monetary damages but also wants Farnsworth and Lowe blackballed from ever again holding a director or executive position in any SEC-registered company.
A spokesman for Farnsworth said that his legal team plans to challenge the SEC's allegations claiming the matter was settled "nearly three years ago."
"Mr. Farnsworth continues to maintain that he has always acted in good faith in the best interests of his companies and shareholders," the spokesman told Bloomberg.
A lawyer for former MoviePass Vice President Khalid Itum also claims innocence in the case saying the SEC has "unfairly targeted" Mr. Itum.
"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," Itum's attorney Adam Fee stated.
Neither Lowe nor his representatives have commented on the lawsuit.