App Annie and its founder to pay over $10 million to settle securities fraud charges
The U.S. Securities and Exchange Commission (SEC) charged App Annie and its co-founder and former CEO and Chairman Bertrand Schmitt with securities fraud. SEC found that the mobile analytics firm engaged “in deceptive practices” and made “material misrepresentations” about how it obtained its market data on mobile app performance. Without admitting or denying the SEC’s findings, App Annie agreed to pay more than $10 million to settle the matter.
App Annie provides its clients among developers, publishers, advertisers and marketers with market data not contained within companies’ financial statements or other traditional data sources. This kind of data includes estimates on how many downloads an app has generated, how often it’s used, and how much money it is bringing in for the company.
How does App Annie make these estimates? As the SEC explains, companies willingly share their confidential app performance data with App Annie because the latter has assured them that the data would not be directly disclosed to third parties. According to the SEC, App Annie and Schmitt said they would aggregate and anonymize the data and only then use it in a statistical model to generate estimates of app performance.
However, the Commission found 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 for its clients who thought they were buying “the product of a sophisticated statistical model.”
And here comes the security fraud part. As per the SEC’s findings, App Annie and Schmitt convinced the firm’s trading firm customers that its estimates were generated with consent from companies that shared their confidential data and in compliance with the federal securities laws. Moreover, App Annie and Schmitt knew that these estimates were relied upon by trading firm customers to make investment decisions. Fully aware of that, App Annie went as far as to share 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.”
The SEC found that App Annie and Schmitt violated the anti-fraud provisions under the Exchange Act. The Commission issued a cease-and-desist order under which App Annie has to pay a penalty of $10 million, while Schmitt has to pay a penalty of $300,000. Schmitt is also prohibited from serving as an officer or director of a public company for three years.
Without admitting or denying the findings, App Annie and Schmitt have agreed to pay their respective penalties to settle the matter. App Annie has also made a statement concerning “certain practices at App Annie through mid-2018.” The firm emphasised that the SEC’s findings “did not relate to our current products, nor did it relate to our current relationships with customers.”
In a separate statement for Game World Observer, Theodore Krantz, App Annie CEO since May 2018, has also commented on the news, stressing the importance of regulatory oversight in the alternative data market:
“Since I have taken over as CEO, we have established a new standard of trust and transparency for the newly created alternative data market. App Annie is uniquely positioned to be the first to deliver on a unified data AI vision,” said Krantz. “Many businesses may be unknowingly leveraging data reliant on confidential public company information without explicit consent which we believe puts companies using digital/mobile market data at significant risk. It is our opinion that the entire alternative data space needs to be regulated.”
