This is why the SEC fined App Annie $ 10 million

Tuesday Securities and Exchange Commission announced she accused App Annie, a major mobile data provider, of securities fraud, alleging that the Californian company “materially misrepresented” customers and investment companies in relation to the data it collected and pledged. App Annie has agreed to pay $ 10 million to settle the investigation, according to the SEC.

While the Commission has previously imposed huge fines for data privacy issues, they have mostly focused on companies such as First American or Pearson misleading investors and shareholders about the meager cybersecurity practices of their respective companies. The App Annie case, according to the SEC, is slightly different. The company says that instead of accidentally disclosing confidential information about its customers, App Annie simply promised its customers that it would use its data unilaterally and then backtracked on that promise. This shows that the data broker industry can have a wide range of effects that go far beyond targeted advertising.

V SEC Directive Expresses claims in more detail. For those who don’t know, App Annie is a company that collects application data from countless people using many sourcessuch as ad networks and consumer panels. App Annie then sells that data as a separate product – Intelligence – to customers who want to figure out, say, estimates such as overall app usage, revenue, or downloads. The order notes that from 2014 to 2018, over 100 merchants paid App Annie for the product to help them make investment decisions.

Understanding where intelligence is wrong – and how these firms were misled and why – is … difficult. We’ll do our best to break it:

1. One of App Annie’s leading technology products is called Unitewhich the company offers for free to any developer looking for simple analytics. In return, App Annie gains access to fairly sensitive information about the app: the total number of apps used, its total revenue, how well it retains users, and more. This data ultimately fuels the further development of the App Annie Intelligence product.

2. App Annie informed app developers that ultimately yes, her data will be included in any product sold under its Terms of Service, but has promised that their details will be anonymous using “aggregated pools of information” before that happens.

The company also promised to conduct certain compliance checks. federal securities laws when dealing with public company applications it will be aboard his technology. In these cases, the SEC writes, App Annie has promised companies that they will be able to implement analytics without leaking their sensitive data into a larger product in the future.

3. The biggest snag was that App Annie didn’t actually deliver on its promises. According to the SEC, App Annie “failed to direct anyone to [the company] document any such policy prior to 2017, although App Annie has been making these promises since late 2014. And even then, data from public companies were still used. In the document:

When App Annie first documented a policy restricting the use of a public company’s Connect Data in April 2017, the policy only required that the statistical model exclude app revenue data from certain public companies (i.e., those whose app revenue exceeded 5% of the of total company revenue

Until the company learned of the June 2018 SEC investigation, “all data on app downloads, all data on app usage, and some data on app revenue from public companies were used in the App Annie statistical model,” the SEC writes. And it only gets worse.

4. Between 2015 and 2016, the SEC says the App Annie team is “increasingly concerned” about complaints that its Intelligence scores are not accurate enough to match actual performance metrics generated in Connect users’ apps. To get customers to stop going to competitors, App Annie had two options: rethink the algorithm.s that have been embedded in intelligence or are committing fraud. Since the said overhaul would be “too expensive and time consuming to implement,” the company appears to be chose option B. (App Annie does not admit wrongdoing, but simply does everything that guilty of wrongdoing.)

5. App Annie Engineering Team from Beijing said then-CEO Bertrand Schmitt to add a secret, extra step to the end of Intelligence’s existing algorithmic workflow: “halving errors.” This step, the SEC explained, compares real sensitive information, such as revenue and app usage data, that App Annie was able to get from Connect users with any scores that Intelligence was going to give out to subscribers. If these numbers are too far apart, this step will “cut the difference in half” and replace that number with intelligence instead.

6. Obviously, this whole process was so secret that no one in the company, with the exception of Schmitt and his team in China, even knew about its existence. Client representatives and executives were unaware that they were selling data to investment firms that might have tampered with some securities laws, and investment firms were unaware that they were using the data to buy or sell stocks. The only difference was that somehow The numbers that App Annie reported on public company apps were much closer to those reported by these companies in their income statements.

7. Investors were happy (and profitable), which meant App Annie was happy (and profitable) – at least until the SEC came along. According to the SEC, as soon as the company learned of the Commission’s investigation, App Annie succeeded in everything: it removed the data of public companies from its statistical models, stopped faking these models, secretly adding them. data, and got a new CEO after Schmitt mysteriously decided to retire.

This brings us to the current day and the current allegations that can best be summarized with this statement by Gurbir Greval, SEC’s enforcement officer:

Federal securities laws prohibit any misrepresentation or material misstatement in connection with the purchase or sale of securities. Here, App Annie and Schmitt lied to companies about how their sensitive data was being used, and then not only sold manipulated ratings to their trading firm clients, but encouraged them to trade based on those ratings, often advertising how closely associated they were with the companies. ‘true performance and stock prices.

Yes, that definitely sounds fake, okay!

For its part, App Annie did not acknowledge the agency’s findings, but did not deny them either. In addition to a $ 10 million fine, Schmitt will have to pay his $ 300,000 fine and will be barred from serving as an officer or director of any public company for the next three years.

Following the SEC announcement, both App Annie and Schmitt made their own statements. App Annie’s memo notes that the investigation “had nothing to do with our current products or our current customer relationships.” Meanwhile, Schmitt resigned from the App Annie board of directors and resigned. mail to his Linkedin followers, letting them know he’s sorry ™:

We moved quickly and innovated in the new space, but we have always understood that compliance is a critical business element in enabling customers to trust the ratings we provide them. We received legal advice on compliance procedures and even hired an in-house compliance team, but as a private company we did not understand that our level of control over the use of sensitive data in our evaluations for analytical reports could form the basis of the SEC Action. In fact, I believe the SEC claims represent a significant extension of the existing law.

Besides App Annie, there is about 400 other companies in the so-called “alternative data” space, a term that trading firms use to describe non-financial information used to make trading decisions. This ranges from organizations like App Annie offering app statistics to companies selling anything from people. e-mail receipts to literal satellite imagery… In a little advice to fellow startup founders looking to broker such data, Schmitt cryptically remarked that “if investors are users of your data, you can expect regulators to look very broadly at how securities laws can be applied. “.

According to the SEC, this settlement marks the first time an agency has indicted one of these alternative data providers for securities fraud. Considering how such companies tend to work when it comes to processing any personal data of the application, it is worth assuming that they will not be the last.