On Tuesday, September 14th, the Securities and Exchange Commission (“SEC”) announced its first enforcement action against an alternative data provider, charging the company App Annie Inc. with securities fraud. App Annie and Bertrand Schmitt, its co-founder and former CEO and Chairman, have agreed to pay more than $10 million in a settlement with the SEC on these charges. [1]
While this marks the SEC’s first enforcement action against an alternative data provider, it likely will not be its last, as the use of alternative data in the financial and investment sphere continues to rise. [2] Alternative data (“alt-data”) is data which goes beyond that of traditional corporate financial statements and helps guide investment strategies. [3] Examples of alt-data include mobile device data, credit card transactions, satellite imagery data, product reviews, and even social media activity. [4]
This type of data can be instrumental in making sound investment decisions when it is paired with traditional data from corporate sources, because it provides a broader view of a company’s financial viability. [4] However, it is notoriously difficult to aggregate and analyze given its vast breadth – it’s estimated that the world produces at least 2.5 quintillion bytes of such data daily. [4] This is where companies like App Annie come in.
App Annie, one of over 400 alt-data providers currently in operation, provides its customers with alt-data aggregation resources and insights. In particular, the company focuses on mobile app performance, providing its customers with estimates of app downloads, usage rates, and revenue generation for a given company. [1] These insights, in turn, help trading firms and customers make sound investment decisions. However, the SEC alleges, App Annie made material misrepresentations to its users, leading to the securities fraud charges at hand. [1]
In particular, the SEC alleges that App Annie committed violations of the anti-fraud provisions of Section 10(b) of the Exchange Act by assuring its customers that the financial data it sold was subject to an advanced statistical model in line with federal securities laws. On the contrary, the SEC posits that App Annie had no such statistical model in place, instead relying on “non-aggregated and non-anonymized” data to make its model-generated estimates appear more lucrative to trading firms.[1]
Because App Annie’s deceptive practices coincide with the purchase or sale of securities, the situation was ripe for SEC intervention. Furthermore, the SEC’s September 14th statement notes that App Annie was well aware that they could only garner the confidential data they sought from customers by promising to keep it confidential; however, the data was not kept confidential as promised.
While App Annie, along with Bertrand Schmitt, settled with the SEC without admitting nor denying any of its allegations, this situation should serve as an eye-opener for firms and investors alike. When it comes to confidential, sensitive, data, it is critical to vet who has access. Even companies purporting to act in their customers best interest may have ulterior motives.
Considering the wealth of data points that most people produce every day, it’s critical to understand how companies may interact and analyze them. Just as important, society should also remain vigilant as to who is trusted with personal or sensitive data, and carefully vet alt-data providers to help guide investment decisions. For further insight or counsel, please reach out to one of our experienced attorneys here at Savage Villoch Law.
Sources:
[1] https://www.sec.gov/news/press-release/2021-176
[2] https://www.datadriveninvestor.com/alternative-data/#The_Growth_of_Alternative_Data
[3] https://builtin.com/fintech/alternative-data
[4] https://amplyfi.com/2021/07/08/what-is-alternative-data/