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Insider trading and the dangers of data for contractors

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SEC charges Netflix insider trading ring led by software engineers

If you are a contractor or freelancer of a publicly-traded company or a start-up that is looking to list, know the dangers of sharing data or even trading on it.

The US Securities and Exchange Commission announced on 18 August 20201 insider trading charges against three former Netflix Inc. software engineers and two close associates who generated over $3 million in total profits by trading on confidential information about Netflix’s subscriber growth.

According to the SEC’s complaint, Sung Mo “Jay” Jun was at the centre of a long-running scheme to illegally trade on non-public information concerning the growth in Netflix’s subscriber base, a key metric Netflix reported in its quarterly earnings announcements.

The complaint alleges that Sung Mo Jun, while employed at Netflix in 2016 and 2017, repeatedly tipped this information to his brother, Joon Mo Jun, and his close friend, Junwoo Chon, who both used it to trade in advance of multiple Netflix earnings announcements.

The SEC’s complaint further alleges that after Sung Mo Jun left Netflix in 2017, he obtained confidential Netflix subscriber growth information from another Netflix insider, Ayden Lee. Sung Mo Jun allegedly traded himself and tipped Joon Jun and Chon in advance of Netflix earnings announcements from 2017 to 2019.

Data: contractors, be careful what you share

Not sure, what constitutes insider trading? Here’s an example. Suppose the CEO of a publicly-traded firm inadvertently discloses their company’s quarterly earnings while getting a haircut. If the hairdresser takes this information and trades on it, that is considered illegal insider trading, and the SEC may take action, according to Investopedia.

In the Netflix case, the SEC alleges that Sung Mo Jun’s former Netflix colleague Jae Hyeon Bae, another Netflix engineer, tipped Joon Jun based on Netflix’s subscriber growth information in advance of Netflix’s July 2019 earnings announcement.

Sung Mo Jun, Joon Jun, and Chon allegedly used encrypted messaging applications to discuss their trading in an attempt to evade detection. According to the complaint, Sung Mo Jun, Joon Jun, and Chon made approximately $3 million in total profits from the illegal scheme.

The SEC Market Abuse Unit’s Analysis and Detection Center uncovered the trading ring by using data analysis tools to identify the traders’ improbably successful trading over time.

“We allege that a Netflix employee and his close associates engaged in a long-running, multimillion dollar scheme to profit from valuable, misappropriated company information,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office. “The charges announced today hold each of the participants accountable for their roles in the scheme.”

“The defendants allegedly tried to evade detection by using encrypted messaging applications and paying cash kickbacks,” added Joseph Sansone, Chief of the SEC’s Market Abuse Unit. “This case reflects our continued use of sophisticated analytical tools to detect, unravel and halt pernicious insider trading schemes that involve multiple tippers, traders, and market events.”

The SEC’s complaint, filed in federal court in Seattle, charges Sung Mo Jun, Joon Jun, Chon, Lee, and Bae with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Sung Mo Jun, Joon Jun, Chon, and Lee have consented to the entry of judgments which, if approved by the court, would permanently enjoin each from violating the charged provisions, with civil penalties, if any, to be decided later by the court.

Director no more

Sung Mo Jun also agreed to an officer and director bar. Bae consented to the entry of a final judgment, also subject to court approval, permanently enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 and imposing a civil penalty of $72,875.

In a parallel action, the US Attorney’s Office for the Western District of Washington filed a criminal information against Sung Mo Jun, Joon Jun, Chon, and Lee.

Who conducted the investigation?

The SEC’s investigation was conducted by Rahul Kolhatkar of the San Francisco Regional Office and Jonathan Warner of the Market Abuse Unit, with assistance from John Rymas, Hugh Beck, and Darren Boerner of the Market Abuse Unit’s Analysis and Detection Center and Rachita Gullapalli and Erin Smith of the SEC’s Division of Economic and Risk Analysis. The case was supervised by Jennifer J. Lee and Monique C. Winkler of the San Francisco Regional Office, and Steven Buchholz and Mr. Sansone of the Market Abuse Unit. The litigation will be led by Marc Katz, Mr. Kolhatkar, and Mr. Warner.

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