(CN) – Helios and Matheson Analytics Inc., the majority owner of popular theater service MoviePass, faces a class action by shareholders who claim the company lied about MoviePass’ financial prospects.
Shareholders filed the complaint in the Southern District of New York, claiming Helios engaged in misleading statements about the viability of MoviePass’ business model after Helios’ recent stock purchases gave it over 80 percent ownership of MoviePass.
MoviePass previously operated in theater ticket sales by offering subscribers one ticket per day for a flat subscription price. Recently, MoviePass changed those policies by capping the subscribers at three movies per month.
Mitch Lowe, current CEO of MoviePass and co-founder of Netflix called MoviePass an “all-you-can-eat” movie theater experience in a press release filed with the Securities Exchange Commission.
“Though expensive for the company in the short-term, it’s a significant benefit and more convenient for customers,” said Lowe. “With MoviePass, there’s no movie ticket prices to think about. Going to the movies will become an everyday experience rather than an occasional treat.”
According to NBC News, the policies changed after MoviePass was losing as much as $20 million per month for their service, despite popularity with moviegoers.
The class claims that Helios “recklessly disregarded” issues with the company’s operations, according to the complaint.
Helios had more than 82 million shares of common stock outstanding, but completed a 1-to-250 reverse stock split, dividing the company stock to over 20 billion shares which artificially propped up the value of the shares, according to the complaint.
Despite the losses MoviePass faced, Helios and MoviePass released multiple public statements telling investors that the increase in subscriptions from the general public were a boon for the firms’ bottom lines.
“I believe we are witnessing a major disruption in the movie industry,” said Ted Farnsworth, Chairman and CEO of Helios. “The marketplace has responded, and we could not be more thrilled with the new subscriber results of MoviePass.”
The class claims these statements made to the public by Helios and MoviePass were “fraudulent,” after the stock fell from $30 per share on July 17th to a nickel on August 14.
An article published on Seeking Alpha stated that the policy changes were only going to “delay the inevitable,” and that “there is no sign that the company will be able to get losses under control.”
“There was no reasonable basis to believe that MoviePass could monetize the model to a degree that could be maintained before being too buried in debt to survive,” the complaint states.
The class is represented by Mark Levine and Melissa Emert of Stull, Stull & Brody in New York and Joshua H. Eggnatz and Michael J. Pascucci of Eggnatz Pascucci in Davie, Fl.