App Annie is a leading alternative data provider for the mobile app industry which claims to have data on over 8 million apps and thousands of websites. It claims to provide its customers with a complete picture of the mobile landscape needed to acquire and retain customers.
Unfortunately for the company and its former CEO and Chairman Bertrand Schmitt, the SEC filed securities fraud against them for allegedly engaging in deceptive practices and making material misrepresentations about how App Annie’s alternative data was derived.
The SEC announced a settlement with App Annie and Schmitt who agreed to pay more than $10 million to settle the matter, which is the SEC’s first enforcement action charging an alternative data provider with securities fraud.
According to the SEC’s order, App Annie is one of the largest sellers of market data on mobile app performance, including estimates on the number of times a particular company’s app is downloaded, how often it’s used, and the amount of revenue the app generates for the company. Trading firms commonly refer to this type of information as “alternative data” because it is not contained within companies’ financial statements or other traditional data sources.
The order finds that App Annie and Schmitt understood that companies would only share their confidential app performance data with App Annie if it promised not to disclose their data to third parties, and as a result App Annie and Schmitt assured companies that their data would be aggregated and anonymized before being used by a statistical model to generate estimates of app performance. Contrary to these representations, the order finds that from late 2014 through mid-2018, App Annie used non-aggregated and non-anonymized data to alter its model-generated estimates to make them more valuable to sell to trading firms.
The order further finds that App Annie and Schmitt misrepresented to their trading firm customers that App Annie generated the estimates in a way that was consistent with the consents it obtained from companies that shared their confidential data, and that App Annie had effective internal controls to prevent the misuse of confidential data and to ensure that it was in compliance with the federal securities laws. According to the SEC’s order, App Annie and Schmitt were aware that trading firm customers were making investment decisions based on App Annie’s estimates, and App Annie also shared ideas for how the trading firms could use the estimates to trade ahead of upcoming earnings announcements.
“The federal securities laws prohibit deceptive conduct and material misrepresentations in connection with the purchase or sale of securities,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “Here, App Annie and Schmitt lied to companies about how their confidential data was being used and then not only sold the manipulated estimates to their trading firm customers, but also encouraged them to trade on those estimates—often touting how closely they correlated with the companies’ true performance and stock prices.”
“App Annie sought to distinguish itself in the alternative data space by providing securities market participants with valuable information in a new and innovative way,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office. “It went to great lengths to assure its customers that the financial and app-related data it sold was the product of a sophisticated statistical model and that it had controls to ensure compliance with the federal securities laws. These representations were materially false and misleading.”
The SEC’s order finds that App Annie and Schmitt violated the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the findings, App Annie and Schmitt consented to the entry of a cease-and-desist order under which App Annie is ordered to pay a penalty of $10 million, Schmitt is ordered to pay a penalty of $300,000, and Schmitt is prohibited from serving as an officer or director of a public company for three years.
Is the SEC seeking a cease and desist order or an injunction against you? Call Sallah Astarita & Cox at 212-509-6544, a national law firm comprised of former SEC Enforcement Attorneys and securities defense attorneys with over 100 years of experience