The New York Attorney General has launched an investigation into whether Helios & Matheson Analytics, the financially struggling majority owner of movie-subscription provider MoviePass, misled investors.
The investigation is being conducted by New York Attorney General Barbara G. Underwood’s office under the Martin Act, an anti-fraud law that allows the AG to conduct investigations of securities fraud and bring legal action against alleged violators.
Underwood confirmed the probe in a tweet Thursday morning, in which she wrote, “We’ve launched a securities fraud investigation into @MoviePass’ parent company. My office is committed to protecting New York investors and the integrity of our financial markets.” The New York AG’s office did not respond to a request for more info about the HMNY probe.
In a statement to Variety, Helios & Matheson said, “We are aware of the New York Attorney General’s inquiry and are fully cooperating. We believe our public disclosures have been complete, timely and truthful and we have not misled investors. We look forward to the opportunity to demonstrate that to the New York Attorney General.”
The initiation of the New York AG’s investigation into Helios & Matheson was first reported by CNBC.
Earlier this year, MoviePass touted that it had topped 2 million subscribers for its service letting customers see one movie per day for just $9.95 per month. But the deal was too good to be true: The surge in users caused an enormous cash drain on HMNY and the company was forced to take out several loans. To stay afloat, MoviePass drastically changed its offer in August to limit customers to only three movies per month for the same price and curtailed access to wide-release movies during peak demand.
Investors haven’t hid their unhappiness with Helios & Matheson’s alleged lack of disclosures. HMNY stock is currently trading for about 2 cents per share, giving it a market cap of less than $25 million.
Helios & Matheson and top execs were named in a lawsuit filed Aug. 13 on behalf of shareholder Jeffrey Braxton in the U.S. District Court for the Southern District of New York, alleging the company deceived investors. According to the suit, which seeks class-action status, “MoviePass’ business model was not sustainable because there was no reasonable basis to believe MoviePass could monetize the model to a degree that could be maintained before being too buried in debt to survive.”
Also in August, Carl J. Schramm, former president and CEO of the Ewing Marion Kauffman Foundation, resigned from Helios & Matheson’s board. In his resignation letter to HMNY CEO Ted Farnsworth, Schramm charged that the company did not furnish information about its financial status and operations.
According to Schramm, Helios & Matheson management withheld “material information” from the board for several months. “As you know, for several months now, I have raised questions and expressed concerns about the corporate governance of Helios and Matheson Analytics, Inc.,” Schramm wrote in the letter, as filed with the SEC. “I have objected to the manner in which a number of business decisions have been presented to the Board of Directors by management, without sufficient time for the Board to examine complex documents, to review significant transactions, or to discuss how the proposed actions fit into the Company’s strategic plan.”
In response to Schramm’s letter, HMNY said in an Aug. 25 filing that “The company is unaware of any unanswered requests for information by Mr. Schramm. The board and committees of which Mr. Schramm was a member have met at least 25 times at duly convened meetings thus far in 2018, and the company firmly believes that it has kept the board fully informed and has provided all information needed for board members to exercise their responsibilities.”
In an Oct. 4 regulatory filing, Helios & Matheson said it had raised $65 million in August and September via sales of its stock under an existing equity distribution agreement as well as prepayments by investors of “certain existing investor notes payable to the company.”
HMNY disclosed in the same filing that Canadian investment bank Canaccord Genuity terminated its equity distribution agreement with Helios & Matheson, which had allowed HMNY to sell the company’s shares.
This week Helios & Matheson announced that proxy-advisory firms ISS and Glass, Lewis & Co. recommended that HMNY stockholders vote for a proposed reverse stock split at the company’s special meeting scheduled for Thursday (Oct. 18). The 1-for-500 reverse stock split proposal — converting each 500 shares of HMNY owned to one share — is designed to regain compliance with the Nasdaq Capital Market’s $1-per-share minimum bid price requirement. That’s after the company enacted a 1-to-250 reverse stock split in July.