DOJ Warns Against AI Washing as Ex-MoviePass CEO Pleads Guilty

The former chief executive of MoviePass’ parent company has admitted to defrauding the company’s investors.

Ted Farnsworth, 62, pleaded guilty to one count each of securities fraud and conspiracy to commit securities fraud, the Department of Justice (DOJ) announced Tuesday (Jan. 7). He faces up to 25 years in prison in what the department’s criminal division calls one of the first “AI washing” prosecutions.

Farnsworth, former CEO of MoviePass owner Helios and Matheson (HMNY) and of Vinco Ventures, had been charged in 2022 with misleading investors in the subscription movie service.

The Justice Department had alleged that Farnsworth and another executive had told investors that the plan to offer $9.95 per month subscriptions for “unlimited” tickets was a viable and profitable endeavor, while in private considering the idea a temporary marketing ploy. Mitch Lowe, CEO of MoviePass, pleaded guilty to securities fraud in September.

The DOJ further alleged that the executives told investors that HMNY was using artificial intelligence (AI) to generate revenue by collecting and monetizing subscriber data, even though the company possessed no such technology.

“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,” Brent S. Wible, the principal deputy assistant attorney general in charge of the DOJCriminal Division, said in a news 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. The Criminal Division is committed to protecting investors from criminals who engage in fraudulent schemes, including those that employ AI washing.”

The term “AI washing” is inspired by “greenwashing,” or when companies overstate or misstate their environmental records. The Securities and Exchange Commission (SEC) issued a warning against the practice in 2023, and last year charged investment advisers Delphia and Global Predictions with making fraudulent claims about their AI usage.

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies,” SEC Chairman Gary Gensler said last year. “Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”