OPINION AND ORDER MoviePass, Inc. (“MoviePass”) is a subscription service that, during the relevant time period, allowed subscribers to pay a fixed monthly fee to see multiple movies per month at participating theaters. In August 2017, Helios and Matheson Analytics Inc. (“HMNY,” and together with MoviePass, the “Companies”) acquired MoviePass. Unfortunately for HMNY and its investors, HMNY was not able to make MoviePass profitable following the acquisition, and HMNY, along with MoviePass and its other subsidiaries, ultimately filed Chapter 7 liquidation petitions in January 2020. The United States Securities and Exchange Commission (the “SEC” or “Plaintiff”) brought this enforcement action against Theodore J. Farnsworth and J. Mitchell Lowe, alleging that between 2017 and 2019 — when Farnsworth and Lowe were Chief Executive Officers (“CEOs”) of HMNY and MoviePass, respectively — they made material misstatements about MoviePass and engaged in a fraudulent scheme to deceive HMNY investors, in violation of Section 17(a) of the Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. Additionally, the SEC claims that Farnsworth and Lowe participated in the falsification of HMNY’s books and records in conjunction with another former MoviePass employee, Khalid Itum (together with Farnsworth and Lowe, “Defendants”), in violation of Section 13(b) of the Exchange Act and Rules 13b2-1 and 13b2-2 promulgated thereunder. Before the Court are Defendants’ motions to dismiss. For the reasons set forth in the remainder of this Opinion, the Court grants in part and denies in part Defendants’ motions. BACKGROUND1 A. Factual Background 1. The Parties HMNY is a Delaware corporation with its principal place of business in New York, New York. (Compl. 16). HMNY’s common stock is registered pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ exchange until January 2019. (Id. 17). The company filed a bankruptcy petition in January 2020. (Id. 18). Farnsworth, a resident of Miami, Florida, was the Chairman and CEO of HMNY from January 2017 until September 2019. (Id. 13). MoviePass is a privately held Delaware corporation with its principal place of business in New York, New York. (Compl. 19). Lowe, a resident of Miami Beach, Florida, and Puerto Vallarta, Mexico, was the CEO of MoviePass from 2016 to 2020. (Id. 14). MoviePass’s primary product offering was a movie subscription service, whereby subscribers could pay a fixed monthly fee to see a certain number of movies each month. (Id. 20). Subscribers were issued a debit card through which they could purchase one ticket for a specific movie, theater, and show time selected through the MoviePass application on their phones. (Id.). On August 15, 2017, HMNY announced its intention to acquire MoviePass (the “Announcement”), which it completed in December 2017 (the “Acquisition”). (Compl.
26-28). MoviePass then became a subsidiary of HMNY. (Id. 19). Prior to the Acquisition’s closing, in November 2017, HMNY issued $100 million in convertible notes, and in February 2018, just two months after the closing, HMNY conducted a public offering of warrants that raised approximately $97 million. (Id. 29). Both of these offerings, the SEC contends, coincided with, and were impacted by, Farnsworth’s and Lowe’s materially false and misleading statements regarding MoviePass. (Id.). By the time HMNY filed its Form 10-K for the 2017 fiscal year in April 2018, it owned approximately 92 percent of MoviePass’s outstanding common stock; MoviePass became HMNY’s core business and its primary source of revenue. (Compl. 28). While MoviePass’s subscription model was HMNY’s primary source of revenue, Farnsworth publicly identified other ancillary sources of potential revenue, including data analytics (id. 43), studio and exhibitor partnerships (id. 49), an associated film production company (id. 51), and entertainment information and marketing (id.), none of which the SEC contends generated meaningful revenue for the Companies (id.
