At Eagle Alpha, we have always, and continue to educate and emphasize the importance of legal & compliance in all alternative data strategies. We are proud to be partnered with Lowenstein Sandler to deliver content and regular Data Strategy webinars for clients on pertinent industry topics. We strictly adhere to FISD standards and highly encourage all our data providers to complete thorough due diligence questionnaires, as requested by funds.
The information presented below comes from news articles and other public sources addressing the SEC’s September 2021 decision to charge App Annie with securities fraud for misrepresentation of their data from the years 2014-2018. For a more in-depth reading on the case, you can access the SEC’s full report here.
Background – On 14th September 2021, the Securities and Exchange Commission (SEC) brought a securities fraud ruling against leading mobile app data provider App Annie and its co-founder and former CEO and Chairman Bertrand Schmitt. The SEC found that at this time the company was “engaging in deceptive practices and making material misrepresentations about how App Annie’s alternative data was derived” that violated anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.”
A Leader in Mobile App Data – From 2014 to 2018 App Annie had more than 100 investment firms paying for subscriptions and then trading on this information. During this time App Annie encouraged trading firms to make investment decisions based on the estimates through investor case studies and other materials. The mobile data supplier provided two products to the broader market. “Connect” enabled companies to visualize and track how their apps are performing and in return for using the free app, App Annie could collect their confidential app performance data. App Annie’s “Intelligence” product, which included “Store Intelligence” (estimates app revenue and app downloads) and “Usage Intelligence” (for estimates of app usage), provided estimates of the data collected through “Connect” via a paid subscription service.
Misrepresentation – For firms trading off of the information provided by App Annie, it was crucial that Intelligence users were assured that all Connect data complied with material non-public information (MNPI) and that App Annie had obtained user consent for the information. The SEC found that during this time there were no internal controls in place to conduct regular reviews around the handling and use of material non-public information.
The Estimate Generation Process – App Annie had represented that Connect information was not used by the company’s statistical model to generate Intelligence estimates. CEO Bertrand Schmitt had agreed to an internal policy that would exclude certain public company’s Connect data from the model but did not direct anyone in the company to create a document on this policy until 2017. In June 2018, following the SEC’s investigation, App Annie amended the policy to fully exclude public company Connect data from its estimate generation process.
Bertrand Schmitt – The Product CEO – Behind the scenes, App Annie had a group of engineers based out of Beijing known as the “delivery team” who made manual adjustments to estimates delivered to Intelligence subscribers. This team was not trained or supervised by the company’s data science group. According to the SEC, Schmitt was aware of this and approved the activities. In 2016, an activity known as “error halving” was approved as a new step in the Intelligence estimate process, that compared model-generated estimates with actual performance figures and then automatically adjusted these figures to be closer to actual numbers. This process went ahead, with the delivery team engineers in Beijing implementing error-halving between March and June 2017.
Violations and Outcome – The SEC found that from 2014 to 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. Additionally, the SEC found that for clients who made investment decisions based on the aggregated data, App Annie misrepresented the data they provided. The SEC found App Annie in violation of the Exchange Act, specifically the rule which prohibits fraudulent conduct in connection with the purchase or sale of securities. The firm has agreed on a settlement following the SEC’s ruling of $10 million, Schmitt has been 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.
Eagle Alpha Perspective It’s important to note that this judgment focuses on the actions of a single data vendor, and is not reflective of the alternative data market more broadly. However, it does emphasize the importance of funds performing thorough legal and compliance due diligence on data vendors and requesting appropriate documentation, reps, and warranties when licensing data sets. The SEC notes in their judgment that App Annie had received inquiries from clients about the “internal controls App Annie had in place to prevent the sale of material non-public information”. This is positive evidence that the buyside is being diligent in their vetting of data vendors, and no doubt will have been noted by the SEC in this case.
Another noteworthy observation is that this is the first SEC action related to alternative data. Several other data providers, such as Yodlee, IBM, and Experian, have faced legal and regulatory scrutiny from other bodies, but this is the first action by the SEC. Also, there has yet to be a single example of legal or regulatory action taken against an alternative data buyer.
At Eagle Alpha, we have always, and continue to, educate and emphasize the importance of legal & compliance in all alternative data strategies. We are proud to be partnered with Lowenstein Sandler to deliver content and regular Data Strategy webinars for clients on pertiment industry topics. We strictly adhere to FISD standards and highly encourage all our data providers to complete thorough due diligence questionnaires, as requested by funds.
Peter Greene, Vice-Chair, Investment Management at Lowenstein Sandler LLP commented:
“The App Annie settlement is important in several respects: most importantly, it demonstrates that the SEC is carefully looking at the use of alternative data by hedge funds and that hedge funds are, as we have cautioned, asking the right questions in connection with diligence and securing the right representations in connection with contract negotiations.”
Related Eagle Alpha Content
- Eagle Alpha Spotlight – Data Privacy and Alternative Data (Edition 2), June 2021.
- Eagle Alpha Spotlight – Mobile App Data, June 2021.
- Eagle Alpha Spotlight- Legal & Compliance Considerations of Alternative Data, April 2021
- Compliance Focus with ACA Group, July 2021.
- Quarterly Compliance featuring Davidson Kempner, April 2021.
- Quarterly Compliance featuring Two Sigma, January 2021.
- Legal Workshop on Data Provenance, August 2020.
- Compliance Discussion with King Street Capital, May 2020.
- Legal Webinar on App Tracking and Email Receipts, November 2019.
- Google Play to Require Android App Data Privacy and Security Disclosures, June 2021.
- Impact of Apple’s iOS 14.5 Update – First Look at Opt-in Rates, June 2021.
- WhatsApp Delays Privacy Update Over Confusion Around Facebook Data Sharing, March 2021.
- Apple’s New Privacy Labels, March 2021.
- Apple’s iOS 14 Privacy Move, February 2021.
- TikTok Facing Legal Challenge Over Mishandling of Private Data, January 2021.
- Apple’s New Rules on User Tracking, Forcing the Hands of Mobile App Developers, January 2021.
- China Removes 94 Mobile Apps for Privacy Violations, December 2020.
- City of Los Angeles Settles with The Weather Channel and IBM, September 2020.