App Annie Founders Charged with Securities Fraud

SEC Charges App Annie with Securities Fraud

The U.S. Securities and Exchange Commission (SEC) has levied charges against App Annie, a prominent firm specializing in mobile data and analytics. Alongside the company, Bertrand Schmitt, its co-founder and former CEO and Chairman, is also implicated in the securities fraud case. Both App Annie and Schmitt have consented to pay upwards of $10 million to resolve the allegations.

Details of the Allegations

The SEC asserts that the fraud stemmed from “deceptive practices and material misrepresentations concerning the origin of App Annie’s alternative data.” App Annie is a major vendor of mobile app performance data, providing crucial insights to developers, publishers, advertisers, and marketers.

This data encompasses metrics such as app downloads, usage frequency, revenue generation, and competitive analysis. Trading firms categorize this information as “alternative data” due to its absence from standard financial statements and traditional data sources, as explained by the SEC.

App Annie reportedly assured app developers that their data would not be directly shared with third parties. Instead, it would be aggregated and anonymized to generate broader app insights. Companies were led to believe the data would fuel a statistical model for estimating app performance.

Misleading Practices Uncovered

However, the SEC alleges that between late 2014 and mid-2018, App Annie utilized non-aggregated and non-anonymized data to refine its model-generated estimates. This was done to enhance their value for sale to trading firms.

Furthermore, the company and Schmitt are accused of misrepresenting to customers how these data estimates were created. They claimed to have obtained appropriate consent from customers and maintained robust internal controls to prevent misuse of confidential data, ensuring compliance with federal securities regulations.

Trading firms relied on this data for investment decisions, and App Annie even offered suggestions on leveraging the estimates for trading ahead of earnings announcements.

Internal Policy Lapses

The SEC’s complaint reveals that in late 2014, Schmitt agreed to a policy excluding certain public company “Connect Data” from the statistical model. However, formal documentation of this policy wasn't initiated until April 2017.

Even when documented, the policy only addressed the exclusion of app revenue data from public companies exceeding 5% of total revenue. It did not extend to app download or usage data.

The SEC states that the documented policy was not consistently enforced. It wasn’t until after the SEC investigation began in June 2018 that App Annie amended the policy to fully exclude public company Connect Data from its estimate generation process.

Manual Alterations and Concealment

The investigation also uncovered that App Annie engineers in Beijing, China, were directed by Schmitt to manually adjust estimates favored by the company’s highest-paying clients. This involved accessing confidential Connect Data, enhancing the accuracy of the estimates.

In 2016, a more automated system for aligning model-generated estimates with actual revenue and download numbers was implemented. When App Annie’s Chief Data Scientist objected, citing the need for adjustments within the statistical model itself, Schmitt bypassed him by instructing the Beijing engineers to make the changes without informing other stakeholders.

SEC Statement and Violations

“The federal securities laws prohibit deceptive conduct and material misrepresentations in connection with the purchase or sale of securities,” stated Gurbir S. Grewal, Director of the SEC’s Enforcement Division.

He further added, “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 trading firm customers, but also encouraged them to trade on those estimates—often touting how closely they correlated with the companies’ true performance and stock prices.”

The SEC alleges violations of the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5.

Settlement Terms and Responses

App Annie has consented to a cease-and-desist order and will pay a $10 million penalty without admitting or denying the findings. Schmitt is ordered to pay a $300,000 penalty and is barred from serving as an officer or director of a public company for three years.

Theodore Krantz, App Annie’s current CEO, released a statement emphasizing the company’s commitment to trust and transparency in the alternative data market. He also advocated for regulation within the space.

Schmitt posted a statement on LinkedIn expressing regret for the procedures that led to the investigation and settlement, while maintaining that App Annie did not disclose customer confidential information.

Current Status and Future Outlook

The company clarified that the SEC investigation does not pertain to its current products or customer relationships. Over the past three years, App Annie has appointed a new CEO and executive team, revamped its data estimation methods, and established a “culture of compliance,” including a Head of Global Compliance.

Launched in 2010, App Annie’s mobile market data solution has grown to serve over 1,100 enterprise clients and a million registered users. The company was reportedly exploring potential sale or IPO options earlier this year.

Further details regarding the complaint and settlement can be found here.