Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 1 of 35
`
`THOMAS P. SMITH, JR.
`CO-ACTING REGIONAL DIRECTOR
`Jack Kaufman
`Elizabeth Butler
`Tiantong Wen
`Attorneys for Plaintiff
`SECURITIES AND EXCHANGE COMMISSION
`New York Regional Office
`100 Pearl Street, Suite 20-100
`New York, NY 10004-2616
`(212) 336-0106 (Kaufman)
`kaufmanja@sec.gov
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`SECURITIES AND EXCHANGE
`COMMISSION,
`
` Plaintiff,
`
` -against-
`
`THEODORE J. FARNSWORTH,
`J. MITCHELL LOWE, and
`KHALID ITUM,
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` Defendants.
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`
`
`
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`
`
`
`COMPLAINT
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`22 Civ. _____ ( )
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`
`
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`
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`JURY TRIAL DEMANDED
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`
`
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`Plaintiff Securities and Exchange Commission (“Commission”), for its Complaint against
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`Defendants Theodore J. Farnsworth (“Farnsworth”), J. Mitchell Lowe (“Lowe”), and Khalid Itum
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`(“Itum”) (collectively, “Defendants”), alleges as follows:
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`SUMMARY
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`1.
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`On August 15, 2017, Helios and Matheson Analytics Inc. (“HMNY”) announced
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`that it had agreed to acquire a majority interest in MoviePass, Inc. (“MoviePass”), a movie
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`subscription service (the “Acquisition”). From August 2017 to at least March 2019, Farnsworth and
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`Lowe, the CEOs of HMNY and MoviePass, respectively, intentionally and repeatedly disseminated
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`to the public materially false or misleading statements concerning MoviePass and key aspects of
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`

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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 2 of 35
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`MoviePass’s business model.
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`2.
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`Farnsworth and Lowe made misstatements in HMNY Commission filings, press
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`releases, and in the press (including during in-person media appearances) regarding whether
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`MoviePass could be profitable at its new, $9.95 per month subscription price (which MoviePass
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`introduced in connection with the Acquisition); purported ways in which MoviePass could become
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`profitable (including through HMNY’s purported data analytics capabilities); and HMNY’s ability to
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`fund MoviePass’s operations. Faced with debilitating negative cash flows—rather than tell the
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`public the truth—Farnsworth and Lowe devised fraudulent tactics to prevent MoviePass’s heavy
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`users from using the service, and falsely and misleadingly informed the public that usage had
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`declined naturally or due to measures the company had employed to combat subscribers’ purported
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`violations of MoviePass’s terms and conditions of service.
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`3.
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`Ultimately, MoviePass’s business model proved unsustainable, resulting in HMNY
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`and its subsidiaries, including MoviePass, filing Chapter 7 liquidation bankruptcy petitions in January
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`2020.
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`4.
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`In addition to the above fraud, between January and April 2018, Farnsworth and
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`Lowe approved false invoices that Itum, a MoviePass executive, submitted to HMNY and
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`MoviePass. Consequently—and through Itum’s submission of additional false documents—Itum
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`wrongfully obtained more than $310,000 from HMNY and MoviePass for his personal benefit.
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`VIOLATIONS
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`5.
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`By virtue of the foregoing conduct and as alleged further herein, Defendants
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`Farnsworth and Lowe have violated Section 17(a) of the Securities Act of 1933 (“Securities Act”)
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`[15 U.S.C. § 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15
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`U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. Defendant Lowe further aided
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`and abetted Farnsworth’s and HMNY’s violations of Section 17(a) of the Securities Act [15 U.S.C.
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`2
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 3 of 35
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`§ 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule
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`10b-5 thereunder [17 C.F.R. § 240.10b-5].
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`6.
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`By virtue of the foregoing conduct and as alleged further herein, Defendants
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`Farnsworth, Lowe, and Itum have violated Section 13(b)(5) of the Exchange Act [15 U.S.C.
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`§ 78m(b)(5)] and Rules 13b2-1 and 13b2-2 [17 C.F.R. §§ 240.13b2-1 and 240.13b2-2] thereunder and
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`aided and abetted HMNY’s violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C.
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`§ 78m(b)(2)(A)].
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`7.
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`Unless Defendants are restrained and enjoined, they will engage in the acts, practices,
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`transactions, and courses of business set forth in this Complaint or in acts, practices, transactions,
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`and courses of business of similar type and object.
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`NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
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`8.
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`The Commission brings this action pursuant to the authority conferred upon it by
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`Securities Act Sections 20(b) and 20(d) [15 U.S.C. §§ 77t(b) and 77t(d)] and Exchange Act Section
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`21(d) [15 U.S.C. § 78u(d)].
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`9.
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`The Commission seeks a final judgment: (a) permanently enjoining Defendants from
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`violating the federal securities laws and rules this Complaint alleges they have violated; (b) ordering
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`Defendants to disgorge all ill-gotten gains they received as a result of the violations alleged herein
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`and to pay prejudgment interest thereon pursuant to Sections 21(d)(3) [15 U.S.C. § 78u(d)(3)],
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`21(d)(5) [15 U.S.C. § 78u(d)(5)], and 21(d)(7) [15 U.S.C. § 78u(d)(7)] of the Exchange Act;
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`(c) ordering Defendants to pay civil money penalties pursuant to Securities Act Section 20(d) [15
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`U.S.C. § 77t(d)] and Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)]; (d) permanently
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`prohibiting Farnsworth and Lowe from serving as an officer or director of any company that has a
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`class of securities registered under Exchange Act Section 12 [15 U.S.C. § 78l] or that is required to
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`file reports under Exchange Act Section 15(d) [15 U.S.C. § 78o(d)], pursuant to Securities Act
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 4 of 35
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`Section 20(e) [15 U.S.C. § 77t(e)] and Exchange Act Section 21(d)(2) [15 U.S.C. § 78u(d)(2)];
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`(e) permanently enjoining Farnsworth and Lowe from directly or indirectly promoting any issuer of
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`any security, causing the promotion of any issuer of any security, or deriving compensation from the
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`promotion of any issuer of any security; and (f) ordering any other and further relief the Court may
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`deem just and proper.
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`JURISDICTION AND VENUE
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`10.
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`This Court has jurisdiction over this action pursuant to Securities Act Section 22(a)
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`[15 U.S.C. § 77v(a)] and Exchange Act Section 27 [15 U.S.C. § 78aa].
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`11.
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`Defendants, directly and indirectly, have made use of the means or instrumentalities
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`of interstate commerce or of the mails in connection with the transactions, acts, practices, and
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`courses of business alleged herein.
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`12.
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`Venue lies in this District under Securities Act Section 22(a) [15 U.S.C. § 77v(a)] and
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`Exchange Act Section 27 [15 U.S.C. § 78aa]. Certain of the acts, practices, transactions, and courses
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`of business alleged in this Complaint occurred within this District, where HMNY and MoviePass
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`maintained their principal places of business.
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`DEFENDANTS
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`13.
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`Farnsworth, age 60, is a resident of Miami, Florida. Farnsworth was the CEO and
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`Chairman of HMNY from January 2017 until his resignation in September 2019.
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`14.
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`Lowe, age 70, is a resident of Miami Beach, Florida, and Puerto Vallarta, Mexico.
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`From 2016 to 2020, Lowe was the CEO of MoviePass.
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`15.
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`Itum, age 42, is a resident of Los Angeles, California. In approximately October
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`2017, Itum was hired by MoviePass as Vice President, Business Development. As Vice President,
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`Business Development, Itum was part of MoviePass’s leadership team. In October 2018, Itum, was
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`promoted to Executive Vice President. As Executive Vice President, Itum was responsible for
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`4
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 5 of 35
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`MoviePass’s day-to-day operations. Itum resigned from MoviePass effective as of March 19, 2019.
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`OTHER RELEVANT INDIVIDUALS AND ENTITIES
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`A. HMNY
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`16.
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`HMNY is a Delaware corporation with its principal place of business in New York,
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`New York.
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`17.
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`HMNY’s common stock is registered pursuant to Section 12(g) of the Exchange Act.
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`Until January 2019, HMNY’s stock traded on the Nasdaq; today, it is quoted on OTC Link,
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`operated by OTC Markets Group Inc., under the ticker symbol “HMNY.”
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`18.
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`HMNY filed a Chapter 7 bankruptcy proceeding in January 2020.
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`B. MoviePass
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`19. MoviePass is a privately held Delaware corporation with its principal place of
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`business in New York, New York. MoviePass is a subsidiary of HMNY, and MoviePass’s financial
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`statements were consolidated into HMNY’s financial statements.
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`20. MoviePass’s primary product offering was a movie subscription service, whereby
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`subscribers could pay a fixed monthly fee to see a certain number of movies each month.
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`Subscribers were issued a MoviePass debit card that would be credited with the funds to buy one
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`ticket for a specific movie, theater, and show time that they selected through the MoviePass
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`application on their phones.
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`21. MoviePass filed a Chapter 7 bankruptcy proceeding in January 2020.
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`C. Kaleidoscope
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`22.
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`Kaleidoscopic Ventures, LLC (“Kaleidoscope”) is a California limited liability
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`company with its principal place of business in Los Angeles, California. Until July 2021, the
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`company was known as Kaleidoscope Productions, LLC.
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`23.
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`Kaleidoscope describes itself as an experiential marketing firm.
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`5
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 6 of 35
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`24.
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`Itum founded Kaleidoscope in approximately March 2017 and is Kaleidoscope’s sole
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`officer and owner.
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`25.
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`Kaleidoscope has no employees.
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`FACTS
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`I.
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`FARNSWORTH AND LOWE MADE MATERIALLY FALSE OR MISLEADING
`STATEMENTS REGARDING MOVIEPASS’S SUBSCRIPTION PRICE
`26.
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`On August 15, 2017, HMNY and MoviePass announced the Acquisition.
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`27.
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`For at least a year prior to the Acquisition, MoviePass had been in desperate need of
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`financing to continue its operations. During that time period, Lowe had unsuccessfully attempted to
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`raise financing for MoviePass from more than 120 potential investors and, before being introduced
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`to Farnsworth and HMNY, had been ready to give up on MoviePass and shut down the business.
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`28.
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`The Acquisition closed in December 2017. Prior to that date, HMNY already had
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`begun making additional investments in MoviePass, and it continued to do so in 2018. By the time
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`HMNY filed its Form 10-K for the 2017 fiscal year, in April 2018, HMNY owned approximately
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`92% of MoviePass’s outstanding common stock. After the Acquisition, MoviePass became
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`HMNY’s core business and was responsible for the vast majority of HMNY’s revenue.
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`29.
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`In November 2017, HMNY issued $100 million in convertible notes and, in January
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`2018, an additional $60 million in convertible notes. In February 2018, HMNY also conducted a
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`public offering of warrants, which raised approximately $97 million. These HMNY securities
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`offerings coincided with Farnsworth’s and Lowe’s materially false and misleading public statements
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`regarding MoviePass, and HMNY used the proceeds of the offerings to finance its investments in
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`both HMNY and MoviePass.
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`30.
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`Prior to the Acquisition announcement, the price of a MoviePass monthly
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`subscription varied over time and by geographical location—between $12.95 and $89.95.
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`Simultaneous with announcing the Acquisition, at Farnsworth’s and Lowe’s direction, HMNY and
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`6
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 7 of 35
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`MoviePass also announced a single price for all new subscribers: $9.95 per month. At that price,
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`MoviePass told subscribers, they could see “Any movie; any theater; any day.”
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`31.
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`Farnsworth was the impetus for the $9.95 price point and the “any movie; any
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`theater; any day” slogan, which he intended as a marketing gimmick to attract new MoviePass
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`subscribers. However, Farnsworth and Lowe knew that the $9.95 price was not based on market or
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`subscriber testing, and that, to become profitable, MoviePass eventually would need to raise its
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`subscription price significantly and/or generate significant revenue through advertising and
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`otherwise monetizing the data analytics.
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`32.
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`Despite knowing that the $9.95 subscription price had to be a temporary,
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`unprofitable measure, Farnsworth and Lowe publicly claimed that it would allow MoviePass to turn
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`a profit and misleadingly suggested that this key metric was based on rigorous market testing. For
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`example, in an August 16, 2017 interview with Variety.com, when he was asked whether MoviePass
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`would need to raise its prices or risk going out of business, Lowe falsely responded, “The answer is
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`no. [People suggesting that] don’t understand our business model.”
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`33.
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`Similarly, in an interview with Pipeline Data, which HMNY filed with the
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`Commission on September 25, 2017, Farnsworth, citing “historical data,” falsely stated that “we
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`think we can be profitable on the subscriptions at $9.95,” and also that he was “confident”
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`MoviePass would break even on subscriptions alone.
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`34.
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`Farnsworth and Lowe continued to intentionally make similar materially false and
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`misleading statements in subsequent media appearances. For example, when asked in a January 9,
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`2018 joint interview with Yahoo Finance (the “January 2018 Yahoo Finance Interview”) whether
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`$9.95 was “too low of a price point,” Farnsworth misleadingly responded, “No,” while Lowe added
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`that the price point attracted moviegoers who only attended movies five times a year.
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`35.
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`Also in the January 2018 Yahoo Finance Interview, Lowe falsely and misleadingly
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`7
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 8 of 35
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`stated that it was “not true at all” that MoviePass needed movie theatres to agree to provide
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`MoviePass with lower ticket prices in order to turn a profit (i.e., to reduce the difference between
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`what MoviePass paid for movie tickets and what MoviePass received in subscription fees). By that
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`time, however, Lowe knew that the statement was false and, indeed, had been asking MoviePass
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`staff whether MoviePass could remove theatres that charged above $12 or $13 per ticket from its
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`platform. In response, a MoviePass employee had informed Lowe that it would be “tricky” to do, in
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`part because it would “validat[e] . . . that this is not a sustainable product.”
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`36.
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`On February 18, 2018, while appearing on an episode of Recode Media (the “Recode
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`Media Podcast”), Lowe falsely stated that MoviePass “tested like crazy until we were ready to roll
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`out the $9.95 plan.” At the time Lowe made this statement, he knew that MoviePass had not tested
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`the $9.95 price point. Lowe also knew that MoviePass had not determined how to design, let alone
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`implement, a business plan that would allow MoviePass to break even on subscriptions.
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`37.
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`In March 2018, MoviePass hired a Chief Product Officer, whose main focus was to
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`identify a break even business model and then explore how MoviePass could generate additional
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`revenues outside of subscriptions. The Chief Product Officer quit less than six months later, after
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`realizing that MoviePass’s business model would not work. The Chief Product Officer
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`communicated his views to Lowe.
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`38.
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`In addition, while Farnsworth and Lowe publicly claimed that the $9.95 price point
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`supported MoviePass’s mission—which purportedly included supporting the viewing of smaller,
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`independent films in movie theaters—they knew or recklessly disregarded that, in fact, MoviePass
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`was taking steps contrary to those stated missions. For example, in an October 13, 2017 interview
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`with CNBC, Lowe stated that MoviePass “actually want[s] you to go a lot to the movies.” Around
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`this time, however, Lowe was directing MoviePass employees to create a new plan to get to “the
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`desired profitable model in the future,” which included attracting subscribers who saw fewer than 10
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`8
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 9 of 35
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`movies in the prior year, and subscribers who saw blockbusters rather than small films. Days before
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`the CNBC interview, Lowe told Farnsworth that “while this is a bit off our messaging to the
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`industry[,] our most profitable subscribers are those that see mostly films that gross over $50m. Our
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`least profitable are those that see films $10m and less in Box Office.”
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`II.
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`FARNSWORTH AND LOWE MADE MATERIALLY FALSE OR
`MISLEADING STATEMENTS THAT DATA ANALYTICS WERE
`A REVENUE SOURCE FOR MOVIEPASS
`39.
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`In periodic filings with the Commission that Farnsworth signed, HMNY made
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`materially false and misleading statements regarding the very nature of its capabilities, including that
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`it possessed technology platforms focused on “big data” and “artificial intelligence,” among other
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`things. Farnsworth further falsely and misleadingly claimed that HMNY’s data analytics capabilities
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`would improve MoviePass’s service and, when applied to the data MoviePass collected on its
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`subscribers, allow MoviePass to generate significant revenues beyond subscription revenue.
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`40.
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`For example, on September 14, 2017, HMNY filed a Form 8-K with the
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`Commission, which attached a joint HMNY-MoviePass press release. Farnsworth contributed to
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`and approved the press release before it was issued. He also signed the Form 8-K. The press
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`release stated that MoviePass used HMNY resources to “analyze[ ] consumer trends, patterns and
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`activities,” and that HMNY’s technology “learns individual moviegoer’s tastes and makes
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`recommendations based on recorded preferences for specific genres, actors and even the opinions
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`of friends with similar likings.” The press release further quoted Farnsworth as stating, “This
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`explains our sustainable business model: [HMNY] is incorporating advertising models with the
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`MoviePass application using artificial intelligence, algorithms, and machine learning so we can
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`provide studios with more precise data for their advertising efforts.”
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`41.
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`As Farnsworth knew or recklessly disregarded, these statements were false. In fact,
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`at the time, HMNY did not possess the type of data analytics capabilities that it described in its
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`9
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 10 of 35
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`September 14 press release, and HMNY had not incorporated any of its platforms or models into
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`the MoviePass app. Moreover, HMNY had no plan to incorporate any purported data platforms
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`into the MoviePass app, or to use HMNY’s technology to analyze MoviePass’s subscriber data or
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`behavior.
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`42.
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`Farnsworth signed multiple other filings with the Commission that contained similar
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`false or misleading statements regarding HMNY’s purported data analytics capabilities and how they
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`would contribute to MoviePass, including a press release attached to an October 24, 2017 Form
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`8-K; a January 25, 2018 Form S-3; an April 17, 2018 Form 10-K; and a May 15, 2018 Form 10-Q.
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`43.
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`In addition, when asked in the January 2018 Yahoo Finance Interview, “So, what
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`does Helios and Matheson do?” Farnsworth falsely and misleadingly responded, “Helios is really a
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`data analytics company, which really made the perfect marriage of MoviePass and the data analytics
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`of how we’re driving the revenues of the company right now.” In fact, for the fiscal year that ended
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`nine days prior to that interview, MoviePass would report only subscription revenue, and in the first
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`quarter of 2018, it likewise reported revenues composed overwhelmingly of subscription revenue.
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`44.
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`In his own media appearances, Lowe further supported the false narrative that
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`HMNY was a data analytics company. For example, in an October 2017 CNBC interview, Lowe
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`agreed that “a huge amount of [what MoviePass offers] is about the data,” and that this was why
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`HMNY, “a data analytics firm,” bought a majority share of MoviePass. Lowe, however, knew or
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`recklessly disregarded at the time that HMNY was not a “data analytics firm.”
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`45.
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`In February 2018, MoviePass still was not monetizing subscriber data and did not
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`have information regarding specific users’ movie habits sufficient to undertake the type of data
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`analysis described in its September 14, 2017 press release.
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`46.
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`On March 2, 2018, Lowe spoke at the Entertainment Finance Forum, giving a
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`speech titled, “Data is the New Oil: How Will MoviePass Monetize It?” Even though MoviePass
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`10
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 11 of 35
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`was not collecting basic demographic information for all of its subscribers, Lowe falsely and
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`misleadingly stated that MoviePass collected “an enormous amount of information” regarding its
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`subscribers, and that it even tracked its subscribers through their phones. The following week, on
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`March 12, 2018, Lowe issued an email apology to MoviePass’s subscribers, partners, and employees,
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`saying that “through a mix of exuberance about our future and joking around” he “mischaracterized
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`how MoviePass locates [its] members” and explaining that MoviePass did not “track” its subscribers.
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`On March 13, 2018, Farnsworth sent Lowe a text message that HMNY’s stock was “tanking,” and
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`that investors were “saying the exact thing I was afraid of that we are not a big data company and we
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`just admitted it . . . .” While Lowe’s apology acknowledged that MoviePass gathered a more limited
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`universe of data than it had previously led the public to believe, the March 12 apology did nothing to
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`correct the misimpression that MoviePass was using HMNY technology and capabilities to analyze
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`the subscriber data in MoviePass’s possession.
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`III.
`
`FARNSWORTH AND LOWE MADE MATERIALLY FALSE OR MISLEADING
`STATEMENTS REGARDING NON-SUBSCRIPTION REVENUE
`47.
`
`In their media appearances, Farnsworth and Lowe made materially false or
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`misleading statements regarding the effect that MoviePass’s purported non-subscription revenue
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`streams were having on its profitability and future prospects. For example, in the January 2018
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`Yahoo Finance interview, Farnsworth stated that, “within the next sixty days, [MoviePass] should be
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`self-sufficient on its own.” When asked what revenue streams would make that possible, Lowe
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`stated, “Multiple revenue streams,” and he went on to provide, as examples, deals with studios and
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`exhibitors.
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`48.
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`At the time of the January 2018 Yahoo Finance Interview, Farnsworth and Lowe
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`knew that MoviePass would not be self-sufficient within the next 60 days. Although MoviePass was
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`earning small amounts of revenue from studios, and was receiving discounts from some smaller
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`theater chains, those amounts were not close to the level that would be required for MoviePass to be
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`11
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 12 of 35
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`self-sufficient.
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`49.
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`In March 2018, MoviePass announced that it was lowering its subscription price to
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`$6.95 per month, provided subscribers pay for the entire year’s subscription up front. The joint
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`HMNY-MoviePass press release containing that announcement quoted Lowe as saying, “With the
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`current growth and support that we’ve seen within the last several months, our studio and exhibitor
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`revenues and other marketing partnerships have motivated us to lower the price once again, offering
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`movie lovers greater access to MoviePass.” However, this statement was false and misleading
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`because Farnworth and Lowe knew that the reason for lowering the price was not MoviePass’s
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`ability to generate non-subscription revenue but, rather, its need to receive the full year’s
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`subscription payments up front in order to try to ease its and HMNY’s immediate cash pressures,
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`including MoviePass’s financial obligations to its vendors.
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`50.
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`On April 12, 2018, in a joint Yahoo Finance interview with Lowe, Farnsworth falsely
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`and misleadingly stated that MoviePass could generate $6 a month in non-subscription revenue from
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`each subscriber “right now.” Lowe agreed with Farnsworth’s claim during the interview and
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`repeated it in an April 17, 2018 Variety.com article. In making these claims, Farnsworth and Lowe
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`knowingly or recklessly disregarded MoviePass’s internal projections, which estimated that, in fact,
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`MoviePass could generate only $0.50 in non-subscription revenue per subscriber in April 2018, and
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`$2 per subscriber by March 2019. Nor had MoviePass entered into contracts that would enable it to
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`generate non-subscription revenue at the level Farnsworth and Lowe were claiming.
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`51.
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`Between January and May 2018, HMNY formed MoviePass Ventures LLC (“MPV”),
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`a wholly owned subsidiary, as a purported vehicle for distributing films produced by others; acquired
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`MovieFone (“MF”), an entertainment information and marketing service; and entered into a joint
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`venture with Emmett Furla Oasis Films to form MoviePass Films LLC (“MPF”), a film production
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`company.
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 13 of 35
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`52.
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`Farnsworth publicly claimed that these companies were generating ancillary revenues
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`for MoviePass and were helping to push MoviePass along its path to profitability. For example, on
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`July 31, 2018, HMNY filed a Form 8-K (signed by Farnsworth), attaching a joint HMNY-MoviePass
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`press release which stated that “[MPV] and [MPF] are contributing to the company’s ancillary
`
`revenue.” At or about this same time, Farnsworth appeared in broadcast interviews—including a
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`July 25, 2018 interview with Proactive Investors and an August 15, 2018 interview with Fox
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`Business—during which he stated that MoviePass was making money on the alternate revenue
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`streams associated with MPF.
`
`53.
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`The implication of Farnsworth’s statements—that MPF, MPV, and MF were
`
`contributing to MoviePass’s revenues in the third quarter of 2018—was false and misleading. In
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`fact, as Farnsworth knew or recklessly disregarded, MPF, MPV, and MF made no payments to
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`MoviePass in 2018 and, to the extent that any revenues had been accrued on MoviePass’s books,
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`they were not realized. Moreover, MoviePass and HMNY were required to expend significant
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`amounts in connection with the operations of MPF, MPV, and MF.
`
`IV.
`
`FARNSWORTH AND LOWE PREVENTED SUBSCRIBERS FROM USING
`MOVIEPASS, THEN MISLEADINGLY CLAIMED THAT THE LOWER
`USAGE WAS THE RESULT OF NORMAL USER BEHAVIOR
`54.
`
`From at least September 2017 to November 2018, Farnsworth and Lowe made
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`numerous materially false and misleading public statements to the effect that certain “data” indicated
`
`that MoviePass subscriber usage—and therefore, MoviePass’s cost of goods sold—would, and did,
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`naturally decline over time as subscribers settled into a predictable, low rate of usage; and that,
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`consequently, MoviePass could at least break even based on its subscription revenue alone.
`
`A. The All-You-Can-Eat Buffet
`
`55.
`
`Both Farnsworth and Lowe compared long-term subscriber usage to an all-you-can-
`
`eat buffet. For example, in September 2017, Farnsworth told Pipeline Data:
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 14 of 35
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`MoviePass has been around for 5 years, so we have a wealth of historical data. At
`$39, the average customer would go to 4 movies a month. At $29, the average
`dropped to 3 movies a month. When MoviePass went to $19, the average customer
`went to 2 movies a month. So we think we can be profitable on the subscriptions
`at $9.95 and then make the real money from the additional revenue sources. . . .
`History tells us that the average customer won’t abuse the service. Based on our
`historical numbers, MoviePass will be similar [to a buffet]. People will use it three
`times in the first month. The second month, they’ll use it twice. Then, in the third
`month, they’ll use it once or less. After that, they’ll only use it once in a while.
`
`Farnsworth also told Pipeline Data that he was “confident” that MoviePass would break
`
`even on subscriptions alone.
`
`56.
`
`In a February 16, 2018 interview with CNBC, Lowe stated: “Like an all-you-can-eat
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`buffet or any unlimited service, when subscribers first start, they gorge on movies in the first three
`
`or four months. Then they slowly but surely settle into a pattern which is still double what they used
`
`to do.”
`
`57.
`
`In the February 2018 Recode Media Podcast, Lowe made similar representations:
`
`“In our customers’ behavior, there’s two trends. One of them is like if you went to a buffet
`
`breakfast every single morning for two or three weeks, the first couple days . . . [y]ou’re piling up.
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`By the third or fourth day, you’re kind of down to a normal usage. That’s exactly how our
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`customers, they start out, they go to a bunch of movies. They slowly edge down. Here’s the trick:
`
`89 percent of American moviegoers only go to four or five movies a year. When they join
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`MoviePass, they double their consumption and go to about 10 a year. That’s a little bit less than one
`
`a month. They balance out the 11 percent of the population that go 18 times before joining
`
`MoviePass and then after go three times a month. It works out. Over time, it actually works out to
`
`be about one movie per month per subscriber.”
`
`58.
`
`As Lowe and Farnsworth knew, these statements were false or misleading because
`
`MoviePass had not gathered such historical data, there was not a predictable pattern of usage, and
`
`the average users did not “balance out” the heavy users.
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 15 of 35
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`B. The Removal of Costly Films and Theaters to Reduce Cash Burn
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`59. MoviePass removed from its app films that it expected would have high subscriber
`
`demand. For example, on January 6, 2018, Lowe directed MoviePass employees to block six
`
`Bollywood films from the app because Bollywood films were “killing us financially” during a
`
`“financially vulnerable time.” Farnsworth knew of the decision prior to its implementation.
`
`Later in January, MoviePass blocked ten AMC theaters from its app.
`
`Farnsworth knew about and, along with Lowe, made the decision to block the AMC
`
`60.
`
`61.
`
`theaters.
`
`62.
`
`Lowe and Farnsworth thereafter made misleading public statements to the effect that
`
`MoviePass had blocked the AMC theaters because AMC would not work with MoviePass. For
`
`example, in January 2018, various media outlets quoted Farnsworth as stating, “As we’ve grown our
`
`subscriber base, we’ve seen a dramatic increase in movie theater attendance among our subscribers,
`
`which proves to us that MoviePass is working to revitalize a declining industry. Other theater
`
`companies have seen this attendance resurgence and have approached MoviePass to collaborate.
`
`Since the get-go, AMC has not been interested in collaborating with MoviePass—a move that is not
`
`in the interest of our subscribers and AMC theater-goers.” In the February 2018 Recode Media
`
`Podcast, Lowe likewise explained that MoviePass had removed those theatres to “demonstrate to
`
`AMC that really they should be our partner.” This was misleading because, as Lowe texted to
`
`Farnsworth prior to the implementation of the decision, the reason MoviePass was excluding
`
`theaters from the app was to “impact cash flow needs”—i.e., reduce its cash burn.
`
`63.
`
`Lowe later stated that the purpose of blocking the AMC theaters had been to allow
`
`MoviePass to “test” subscriber behavior and that MoviePass turned the theaters back on once the
`
`test was over. For example, in April 2018, Lowe told The Hollywood Reporter that:
`
`[W]e wanted to understand a few things about our subscribers, so we removed, for
`a short period of time for a test, 10 of them in order to understand what our
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`Case 1:22-cv-08226-KPF Document 1 Filed 09/26/22 Page 16 of 35
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`subscribers do. Do they cancel their service because that was their favorite theater?
`Do they go to a competitor like Regal or Cinemark or an independent? And does
`it decrease their moviegoing? . . .
`
`We tested this, we learned a lot, and then the test was over, so we turned them back
`on.
`64. When Lowe made these comments to The Hollywood Reporter, he knew they were
`
`false because he knew that MoviePass’s decision to block the AMC theaters was done to lower its
`
`cash burn. Lowe also knew that MoviePass was forced to unblock the AMC theaters by MasterCard
`
`because limiting the service in this way violated MasterCard’s terms of service.
`
`C. Purported Fraud Prevention Measures
`
`65.
`
`These efforts, however, were not enough to stop the cash burn facing MoviePass,
`
`since the number of subscribers—and their demand fo