In Echo of Expert Network Cases, SEC Reaches Securities Fraud Settlement with Alternative Data Provider

On Sept. 14, 2021, the Securities and Exchange Commission (SEC) entered a cease-and-desist order against App Annie Inc. and its co-founder and former CEO, Bertrand Schmitt, after agreeing to settle securities fraud claims. According to the SEC, App Annie, which collects user data from applications on mobile devices and sells it to investment firms, made misrepresentations to the app companies and investment firm clients about the nature of the data it sold. This deception allegedly led investment firms to unwittingly trade on material nonpublic information. Without admitting or denying the allegations, App Annie agreed to pay a $10 million penalty, Schmitt agreed to pay a $300,000 penalty and accept a three-year officer and director bar, and both the company and Schmitt agreed to cease and desist from future violations of Section 10(b) of the Exchange Act and Rule 10b-5.^[1]

App Annie provided a free service, called Connect, to app companies. The app companies gave App Annie access to confidential user data, and App Annie provided those companies with analytical tools to visualize and understand that data. In return for these analytical tools, Connect customers gave App Annie permission to sell the data to third parties, but only after aggregating and anonymizing it. More than 100 investment firms, among others, received the supposedly aggregated and anonymized data through paid subscriptions to a second App Annie service, called Intelligence.

The SEC alleged that App Annie, contrary to its representations to both its Connect and Intelligence customers, provided its Intelligence customers with estimates of app performance that were based on non-anonymized and non-aggregated data. App Annie included this confidential data in its statistical models in order to bring its estimates closer in line with reality and make its product appear more accurate than its competitors’ and more powerful than it actually was.

The SEC further alleged that App Annie’s marketing material and sales pitches actively encouraged its Intelligence users to make investment decisions based on the data it provided. App Annie touted the accuracy of its models relative to its competitors’ and charged investment firms a premium over its other Intelligence customers. The SEC viewed this as sufficient to satisfy the requisites of Section 10(b) and Rule 10b-5 in connection to the customers’ potential trading. SEC Commissioner Hester Peirce expressed a dissenting view, tweeting, “This settlement stretches the ‘in connection with the purchase and sale of securities’ requirement under 10b/10b-5 beyond where I think it should go.”^[2]

The allegations against App Annie are reminiscent of the expert network cases of a decade ago when the SEC and the Justice Department cracked down on consultants who allegedly provided inside information to hedge funds, hedge fund traders who relied on that inside information to make trades, and expert networks that facilitated these information exchanges.^[3] As the alternative data industry comes to prominence, like the expert consultant industry before it, it will likely draw increased focus from the SEC and, potentially, federal prosecutors. None of App Annie’s investment firm customers have so far been charged in connection with their use of Intelligence data, but funds and others who subscribe to alternative data sources should take heed and take proactive steps to ensure that the data providers’ representations are accurate and that appropriate measures are taken to ensure that subscribers are not receiving material nonpublic information. SEC examiners have been increasingly asking funds about their use of alternative data providers. Indeed, the press release announcing charges against App Annie notes the contribution of several Examinations staff members.^[4]

The case may also serve as a reminder to public companies that make confidential information available to alternative data providers of their obligations under Regulation Fair Disclosure (Reg FD). Reg FD prohibits public companies from disclosing information to select individuals who are likely to trade on that information before disseminating the information broadly to the public. Public companies that give alternative data providers access to their confidential information should perform due diligence to ensure that their data will in fact be aggregated and anonymized so that their material nonpublic information is not inadvertently disseminated.

The use of alternative data may also raise issues under various privacy statutes to the extent the data is based on personally identifiable information of the underlying app users. Recipients will want to ensure that the data has been properly anonymized within the requirements of state privacy statutes and the European Union’s General Data Privacy Regulation (GDPR) to the extent they may be applicable. For example, the GDPR sets a high standard for anonymizing personal data such that it falls outside the scope of the regulation, and the California Consumer Privacy Act similarly imposes requirements on businesses attempting to “de-identify” personal information so that it is not subject to that law.

^[1] _{In the Matter of App Annie Inc. and Bertrand Schmitt, Administrative Proceeding File No. 3-20549, Litigation Release No. 93975 (Securities and Exchange Commission, Sept. 14, 2021) (App Annie Order).}

^[2] _{https://twitter.com/HesterPeirce/status/1437862378713096197.}

^[3] _{See, e.g., Press Release, Securities and Exchange Commission, SEC Charges Hedge Fund Managers and Traders in $30 Million Expert Network Insider Trading Scheme (Feb. 8, 2011), https://www.sec.gov/news/press/2011/2011-40.htm; Press Release, Department of Justice, Former Technology Company Insiders Sentenced In Manhattan Federal Court For Insider Trading (Jul. 1, 2013), https://www.justice.gov/usao-sdny/pr/former-technology-company-insiders-sentenced-manhattan-federal-court-insider-trading; Press Release, Department of Justice, SAC Capital Portfolio Manager Mathew Martoma Sentenced In Manhattan Federal Court To Nine Years For Insider Trading (Sept. 8, 2014), https://www.justice.gov/usao-sdny/pr/sac-capital-portfolio-manager-mathew-martoma-sentenced-manhattan-federal-court-nine.}

^[4] _{Press Release, Securities and Exchange Commission, SEC Charges App Annie and its Founder with Securities Fraud (Sept. 14, 2021), https://www.sec.gov/news/press-release/2021-176.}