SEC Charges App Annie $10M for Securities Fraud, Sets Precedent for Strong Data Laws

App Annie supposedly deceived customers with manipulated, misrepresented, and sold confidential app performance data between 2014 and 2018, for which the SEC charged the alternative data provider as well as former CEO Bertrand Schmitt with securities fraud. Both the company and Schmitt have agreed to pay without admitting or denying the SEC’s findings.

The Securities and Exchange Commission (SEC) has charged App Annie with securities fraud and following deceptive practices. As such, the regulatory body has imposed a penalty of $10 million on the San Francisco, CA-based provider of alternative data pertaining to mobile applications and their vendors.

Specifically, SEC said App Annie and its co-founder, former CEO, and chairman Bertrand Schmitt engaged in “deceptive practices and making material misrepresentations about how App Annie’s alternative data was derived.”

The performance data provided by App Annie is used by customers and investors to make investment decisions. It also helps developers, marketers, and advertisers make relevant decisions in their competitive analysis of the market. Data such as the number of app downloads, frequency of use, the app’s revenue generation, etc., is gathered from ad networks, consumer panels, and the app vendors themselves.

Before App Annie sold this data to its customers, the company had promised to make certain modifications. This is mainly to maintain confidentiality, compliance with federal securities laws, etc. So before the mobile data and analytics provider makes money from the data, it has to conform to standards, one of which is aggregation and anonymization of the data.

As one can guess, App Annie did not fulfill its assurances or uphold the agreement and disclosed app data to third parties. The company engaged in alteration practices based on non-aggregated and non-anonymized data. The data vendor continued to do this between late 2014 through mid-2018 amid growing concerns within App Annie about subscriber complaints about the inaccurate data estimates provided by them.

App Annie presently has 1,100 enterprise clients and more than one million registered users. At the time App Annie was supposedly misleading customers, over 100 trading firms used the company’s data to make investment decisions.

“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. They 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.”

SEC’s investigation report states that beginning in or around mid-2015 and throughout 2016, the Store Intelligence estimates were deviating too far from the actual app performance figures of Connect users. Connect is one of the main products of App Annie that gives insights into app data and is available freely for developers.

What Did Schmitt Do to Improve Accuracy?

Chief data scientist at App Annie, Paul StolorzOpens a new window , recommended an overhaul of the Store Intelligence statistical model to improve the accuracy after an evaluation. This, according to the SEC, was unacceptable to Schmitt, who “rejected the proposal because he believed it would be too expensive and time-consuming to implement, and would result in only modest improvements to the estimates.”

Subsequently, Schmitt resorted to what is now being charged as fraud. The then CEO added a new step, without the knowledge of App Annies’ data science team, in the Store Intelligence estimate delivery process called “error-halving” between March 2017 and June 2017.

This involved a subset of App Annie engineers based in Beijing, China, who in 2014 were tasked with making manual alterations to the data. Error-halving was simply a way to automate the process.

SEC explains error-halving:

“Error-halving compared the model-generated estimates for apps belonging to Connect users with the actual performance figures for those apps (e.g., confidential revenue and download numbers that App Annie had collected for those apps using the Connect users’ app store credentials). It then automatically adjusted the model-generated estimates for those apps to be closer to their actual numbers. Specifically, if the difference between the estimate generated by the model and the actual performance figure for the app was larger than a certain threshold percentage approved by Schmitt, App Annie cut the different alteration practices based on non-aggregated and non-anonymized Connect datace by half and replaced the model-generated estimate with the more accurate number.”

See Also: SEC Slaps $750K Fine on Eight Brokers for Negligence in Email, Data Security

Finally, when App Annie in June 2018 got a whiff of the SEC investigation into the illicit practices, the company ceased all post-model estimate alteration practices. It even stopped including all public company data from its statistical model.

This is possibly why Schmitt’s resignation was shrouded in reticence. Schmitt, in a blog postOpens a new window made yesterday, said he is also stepping down from App Annie’s board. He maintains that they “did not actually disclose any customer confidential information or MNPI (material non-public information) outside the company,” and that the “SEC has made no such claim.”

“My advice to all start-ups that handle confidential data as part of their business models is to think comprehensively about the regulations that might apply to them and over-rather than under-index on compliance controls over that data,” he added. “And if investors are users of your data you can expect that regulators will take a very broad view of how the securities laws may be applied.”

The data analytics provider, through a press releaseOpens a new window , said it is “pleased” with the resolution. The company, which is contemplating an acquisition, an IPO, even a saleOpens a new window , also disassociated its current products and current customer relationships with past activities and the SEC investigation.

App Annie and Schmitt are charged under the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5. The SEC said App Annie neither admitted to nor denied the revelations. Besides the $10 million fine that App Annie agreed to pay, Schmitt himself will also pay out $300,000 as a penalty. Schmitt is also barred from serving as an officer or director of a public company for three years.

SEC said App Annie is the first alternative data provider to be charged and penalized for securities fraud. Cases like these can give a rare insight into the prospects of unlawful dealings pertinent to mobile and tech companies.

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