The former chief executive of the parent company of MoviePass, Theodore Farnsworth, has pleaded guilty to charges of securities fraud and conspiracy. Farnsworth admitted to misleading investors about the service's "unlimited plan" and falsely claiming that the company used artificial intelligence capabilities to generate revenue.

Farnsworth's guilty plea stems from his actions as CEO of Helios & Matheson Analytics (HMNY), the parent company of MoviePass, which acquired a majority stake in MoviePass in 2017. Following the acquisition, MoviePass launched a new "unlimited" plan, offering subscribers the opportunity to watch unlimited movies in theaters for a monthly fee of $9.95. However, the Department of Justice alleges that Farnsworth and his co-conspirators falsely claimed that the unlimited plan was sustainable and would be profitable or break even on subscription fees alone.

In reality, MoviePass lost money from the "unlimited" plan, and Farnsworth was aware that the new plan was a temporary marketing gimmick to attract new subscribers, artificially inflate HMNY's stock price, and attract new investors. The Department of Justice says Farnsworth also made false claims about HMNY's ability to generate revenue by monetizing the data MoviePass collected from subscribers using "big data" and artificial intelligence capabilities.

Farnsworth also falsely claimed that multiple revenue streams, outside of subscription fees, were having a positive impact on the company's profitability, knowing that MoviePass did not have non-subscription revenue streams that would make it self-sufficient. According to the Department of Justice, Farnsworth's actions were part of a larger scheme to defraud investors and enrich himself and his co-conspirators.

"Theodore Farnsworth — formerly the CEO of two publicly traded companies — 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, in a press release. "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."

Farnsworth faces a maximum of 20 years in prison for the securities fraud count regarding MoviePass and a maximum of five years for the conspiracy count related to Vinco Ventures, another publicly traded company where he served as CEO. From November 2020 through September 2024, Farnsworth and his co-conspirators used the same strategies to defraud Vinco investors, according to the Department of Justice.

In a separate development, MoviePass co-founder Stacy Spikes bought back MoviePass in 2021 and relaunched it in late 2022 with a new business model. The relaunch marked a fresh start for the service, which had struggled to stay afloat amid financial difficulties and changing consumer habits.

The guilty plea by Farnsworth serves as a warning to companies and executives who engage in fraudulent activities to artificially inflate their stock prices. The Department of Justice has reiterated its commitment to protecting investors from such schemes, including those that employ AI washing, a tactic used to exaggerate the role of artificial intelligence in a company's operations.

The fallout from Farnsworth's actions will likely have far-reaching implications for the tech industry, highlighting the importance of transparency and accountability in corporate governance. As the case continues to unfold, it will be interesting to see how investors and regulators respond to the revelations and what measures will be taken to prevent similar instances of fraud in the future.