Here’s why the app amended by the SEC Annie $ 10 million

Tuesday, the Securities and Exchange Commission announcement he accused App Annie, a major mobile data provider, of securities fraud, alleging that the California-based company made “material misrepresentations” to clients and investment firms about the data it collected and pledged . App Annie agreed to pay $ 10 million to settle the investigation, the SEC said.

While the Commission has already imposed massive fines for data privacy concerns, they have largely focused on companies like American Premier Where Pearson mislead investors and shareholders about their company’s derisory cybersecurity practices. App Annie’s case, as the SEC explains, is a little different. Instead of the company accidentally disclosing sensitive details about its customer base, it claims that App Annie simply promised its customers that it would use its data one way, and then backtracked on that engagement behind the scenes. This shows that the data broker industry can have far reaching effects that go far beyond targeted advertising.

The SEC Ordinance sets out the claims in more detail. App Annie, for those who don’t know, is a company that aggregates app data from countless people using a a multitude of sources, such as ad networks and consumer panels. App Annie then sells this data as a stand-alone product – “Intelligence” – to customers looking to determine, for example, estimates such as overall usage, revenue, or downloads of an app. From 2014 to 2018, the order notes, over 100 trading companies paid App Annie for this product to guide their investment decisions.

Understanding where Intelligence has gone wrong – and how these companies have been misled, and why – is… complicated. We’ll do our best to break it down:

1. One of App Annie’s flagship technology products is called Connect, which the company offers free to any developer looking for simple analytics. In exchange, App Annie has access to fairly confidential information about the application: the total number of uses of this application, its total revenues, user retention, etc. This data is ultimately what powers App Annie’s Intelligence product later on.

2. App Annie told app developers that ultimately, yes, her data will be turned into a salable product under its terms of service, but promised that their data would be anonymized using “aggregate information groups”, before that happened.

The company also promised that it has certain controls in place to comply with federal securities laws when processing applications from publicly traded companies that incorporate its technology. In these cases, the SEC wrote, App Annie promised companies that they could incorporate the analytics without their confidential information leaking into a larger product.

3. The biggest problem was that App Annie didn’t really keep those promises. According to the SEC, App Annie “did not direct anyone to [the company] document such a policy until 2017, even though App Annie had been making these promises since late 2014. And even so, some data from public enterprises were still used. According to the doc:

When App Annie first documented a policy restricting the use of data from state-owned Connect Data in April 2017, the policy only required that the statistical model exclude data on app revenue from certain state-owned companies (i.e. (i.e. those whose app revenues exceeded 5% of the company’s total revenues.) and imposed no limitations on entering public company app download and usage data into the statistical model.

Until the company becomes aware of the SEC’s investigation in June 2018, “all app download data, all app usage data, and certain app revenue data from,” SOEs were used in App Annie’s statistical model, ”the SEC wrote. And from there, it just got worse and worse.

4. Between 2015 and 2016, the SEC says the App Annie team became “increasingly concerned” about complaints that its intelligence estimates were not accurate enough compared to the actual performance numbers generated. in Connect user applications. In an effort to get customers to stop going for competitors, App Annie had two options: revise the algorithms built into Intelligence or commit fraud. Since this overhaul would be “too expensive and too long to implement,” the company apparently went with Option B. (App Annie doesn’t admit wrongdoing, she just does whatever it takes. done when you are guilty of a wrongdoing.)

5. Then-CEO Bertrand Schmitt asked a Beijing-based team of App Annie engineers to insert an additional secret step at the end of Intelligence’s existing algorithmic workflow: “the reduction half of the errors ”. This step, the SEC explained, compared actual confidential information, such as usage data and app revenue, that App Annie was able to glean from Connect users with the estimates intelligence would spit out for them. subscribers. If those numbers were too far apart, this step would “halve the difference” and swap that number to Intelligence instead.

6. Apparently this whole process was such a secret that no one in the company except Schmitt and his team in China even knew it existed. Representatives and executives in direct contact with clients were unaware that they were selling investment firms on data that could have tampered with certain securities laws, and investment firms were unaware that they were using this information to buy or sell stocks. The only difference was that somehow, the numbers App Annie gave on SOE apps were much closer to what those companies were reporting in earnings calls.

7. Investors were happy (and profitable), which meant that App Annie was happy (and profitable) – at least until the SEC came into the picture. As soon as the company got wind of the Commission’s investigation, the SEC writes, App Annie did everything in its power: it removed SOE data from its statistical models, stopped rigging these models with data added secretly and got a new CEO after Schmitt mysteriously decided to resign.

This brings us to the present day and the current accusations, which can be best summed up with this statement from Gurbir Grewal, supervisor of the SEC’s Enforcement division:

Federal securities laws prohibit deceptive conduct and material misrepresentation in connection with the buying or selling of securities. 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 business customers, but also encouraged them to negotiate on those estimates, often touting how badly they were strongly correlated with business. ‘real performance and share prices.

Yes, that does sound a bit fraudulent!

App Annie, for her part, did not admit the agency’s findings, but she did not deny them either. In addition to the company’s $ 10 million fine, Schmitt will have to pay his own fine of $ 300,000 and will also not be able to serve as an officer or director of a public company for the next three years. years.

In the aftermath of the SEC announcement, App Annie and Schmitt released their own statements. App Annie’s note notes that the investigation “did not concern our current products, nor our current relationships with customers”. Schmitt, meanwhile, resigned from App Annie’s board of directors and has a publication to his Linkedin subscribers to let them know he was extremely sorry ™:

We were moving fast and innovating in a new space, but we have always understood that compliance is a critical part of the business to ensure customers can trust the estimates we provide them. We had obtained legal advice on compliance procedures and even hired an internal compliance team, but as a private company we did not understand that our level of control over the use of confidential data in our estimates for reporting intelligence could form the basis of an SEC Action. Indeed, I believe the SEC claims represent a significant extension of existing law.

In addition to App Annie, there is about 400 other companies in the space known as “alternative data,” a term used by trading companies to describe non-financial information used to make business decisions. This ranges from organizations like App Annie that offer app stats to companies that sell everything from received by email literal Satellite imagery. In a quick tip for his fellow start-up founders wishing to get into brokering this kind of data, Schmitt cryptically noted that “if investors are users of your data, you can expect them to be users of your data. regulators take a very broad view of how securities laws can be enforced.

According to the SEC, the regulation marks the first time the agency has accused one of these alternative data providers of securities fraud. Given the way these types of businesses tend to work when it comes to managing all app’s private data, it’s worth assuming it won’t be the last.