We know MoviePass likes to change up its service offerings without notice, restricting availability or re-enrolling members who previously canceled their service. But did its parent Helios and Matheson Analytics (OTC:HMNY) also play fast and loose with investors by failing to notify them of the risks involved in its strategy?

The New York attorney general's office is going to find out, launching a criminal investigation into whether the company committed securities fraud by misleading investors through its financial disclosures. Although Helios and Matheson says its "public disclosures have been complete, timely and truthful and we have not misled investors," that may not matter in the end. The AG has a powerful tool in its arsenal called the Martin Act, and ambitious prosecutors can wield it like a cudgel to gain a conviction without ever proving intent to defraud or even any negligent conduct.

Couple cringing at movie theater

Image source: Getty Images.

We told you so

For theater lovers, MoviePass and its unlimited movie tickets for $10 a month was a deal too good to be true. The service signed up millions of members seemingly overnight, but even without being told of the risks involved, investors should have realized that at a time when movie tickets cost as much as $15 each in major markets, the sale of even one ticket meant the service was losing money from the start.

But Helios and Matheson did warn that there were substantial doubts about its ability to continue as a going concern because of its subscription plan. It noted its losses were already substantial and could only be met by issuing stock or taking on debt, and they would only get worse with each new member it added.

Such warnings continue today, and in its last quarterly earnings statement in August where it reported year-to-date losses of $110 million, it said it could run out of money within a year if it didn't raise additional capital.

While those statements would seem to comport with Helios and Matheson's claims its financial disclosures met the required standards, that doesn't really matter when it comes to the Martin Act, which The Wall Street Journal has called "the worst law in America" and Crain's New York dubbed a "weapon of mass destruction against business."

Powerful tool or license to abuse?

Enacted in 1921 to root out corruption, the Martin Act was a little-used law until then-Attorney General Eliot Spitzer began wielding it against banks and financial institutions in the run-up to the financial markets' collapse and then afterward as well. It's been used extensively by his successors ever since.

Because the AG doesn't have to prove intent, he has much greater power than the Securities & Exchange Commission and is able to wring large concessions from firms that are investigated with much greater ease. As Crain's notes, it's better for a company to settle than risk trial, because "No financial firm has ever recovered from a criminal indictment, and a company has a duty not to gamble with shareholders' money -- even if executives think the evidence will likely vindicate them."

This is the risk Helios and Matheson Analytics now faces as the attorney general scrutinizes its practices at a time when it is already facing severe financial pressure. While it might not seem MoviePass is long for this world as it is, regardless of what its ticket purchase plan happens to be this week, a fraud investigation that merely has to raise the possibility of an indictment at a time when MoviePass needs to raise cash to merely survive could shut off the financing spigot and send the firm over a cliff from which it may not be able to recover.

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