The Securities and Exchange Commission announced Tuesday that it has charged App Annie, a leading alternative data provider for the mobile app industry, and its co-founder and former CEO and Chairman Bertrand Schmitt, with securities fraud. The company and the co-founder agreed to pay over $10 million to settle securities fraud charges for “engaging in deceptive practices and making material misrepresentations about how App Annie’s alternative data was derived,” SEC said.
The SEC said the enforcement action was the first against a provider of alternative data used by investors to make trading decisions. According to the SEC, trading firms refer to “alternative data” as 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, because it is not included in firms’ financial statements or other data sources.
App Annie assured app developers it would not disclose their data to third parties directly, but would rather use the data in an aggregated and anonymized way to build a statistical model to generate estimates of app performance. However, the SEC said it 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 to sell to trading firms.
“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’s failure to adequately disclose how it generated app-performance insights also misled traders that purchased the data, the SEC said.
Bertrand Schmitt will pay a $300,000 fine and was prohibited from serving as an officer or director of a public company for three years, the SEC said.
The SEC also said Bertrand Schmitt approved his employees’ use of confidential data to improve the models of app performance sold to traders. A team of engineers based in Beijing made manual alterations to App Annie’s Intelligence product that relied on looking at the confidential data, according to the SEC.
“These deceptive practices resulted in App Annie selling Intelligence estimates refined using confidential Connect Data to unknowing trading firm subscribers to use in their purchase and sale of securities,” the SEC said.
The company discontinued the practice in 2018, after it learned about the SEC’s investigation, according to the settlement order.
App Annie said Tuesday that it had made “a number of material changes” in recent years, including appointing a new CEO and a head of compliance. In a statement, Theodore Krantz, App Annie’s current CEO, used the opportunity to call for stricter regulation of the entire industry. “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,” Krantz said. “It is our opinion that the entire alternative data space needs to be regulated.”
Bertrand Schmitt said that he was pleased to conclude the matter and regretted the past procedures faulted by the SEC. He added that after learning about the SEC investigation, he helped improve the company’s compliance with investor-protection laws.