The U.S. Securities and Exchange Commission filed charges last week against three former Netflix software engineers and two associates who made approximately $3 million in profits from insider trading. In the 11-page complaint filed in a federal court in Seattle, the SEC said the group engaged in a three-year scheme of illegally trading based on nonpublic subscriber information in advance of 13 separate Netflix earnings reports from July 2016 to July 2019.
Confidentiality of subscriber information
Netflix shares its subscriber numbers periodically with employees through the company intranet. According to the SEC complaint, “Netflix treats the subscriber numbers as confidential information according to its company policies, including its insider trading policy, which all employees must acknowledge.” Netflix employees are prohibited from using any nonpublic information – including subscriber data – to use or share for their personal gain.
“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, an August 18, 2021 news release. “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 complaint alleges that Sung Mo “Jay” Jun, who worked as a software engineer for Netflix in 2016 and 2017, was at the heart of the scheme before and after his tenure at Netflix. According to the SEC complaint, Sung Mo Jun gave tips to his brother Joon Mo Jun and close friend Junwoo Chon, who used the information to trade Netflix stock prior to quarterly earnings reports from 2017 to 2019. Sung Mo Jun also used the information for financial benefit; he reportedly received tips on subscriber growth from another Netflix employee, Ayden Lee.
The SEC alleges that Sung Mo Jun’s former Netflix colleague Jae Hyeon Bae, who was also a 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 avoid being caught.
In total, the SEC believes that Sung Mo Jun, Joon Jun and Chon made about $3 million in profits from their insider trading scheme. The scheme was uncovered by the SEC Market Abuse Unit’s Analysis and Detection Center through the use of data analysis tools used to identify improbably successful trading over time.
Insider trading charges
The SEC filed a complaint in federal court in Seattle against Sung Mo Jun, Joon Jun, Chon, Lee and Bae. They were charged with violating the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Sung Mo Jun, Joon Jun, Chon and Lee have agreed to the entry of judgments which would permanently enjoin them from violating the antifraud provisions.
In addition, Sung Mo Jun agreed to an officer and director bar. Bae consented to the entry of a final judgment, subject to court approval, which would also permanently enjoin him from violating the antifraud provisions and imposing a civil penalty of $72,875. Separately, the U.S. Attorney’s Office for the Western District of Washington is taking action against Sun Mo Jun, Joon Jun, Chon and Lee. Sun Mo Jun, Joon Mo Jun and Junwoo Chon reside in Washington state; Ayden Lee and Jae Hyeon Bae reside in California.
Frequently reporting the quarterly financials of leading subscription companies, this is something we have been curious about. As required by the SEC, the companies have to disclose certain information during their earnings report, but clearly insiders have to have access to this information to do their jobs, including everything from financial reporting to strategic planning. It was only a matter of time before this type of information was misused for personal gain – and sadly, it was probably not the first, nor will it be the last. Companies like Netflix have to safeguard their data and trust their employees, but they are vulnerable too and, while the SEC can estimate how much the group profited from such a scheme, there is no way to determine what type of damage this has done to Netflix, their stock value or their reputation long term. This is an unfortunate situation and one we will likely see again.