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SEC Reaches Settlement with App Annie: Alternative Data and Implications for Investors

On September 14, 2021, the SEC announced it had reached a settlement with “a leading alternative data provider,” App Annie, and its co-founder and CEO, Bertrand Schmitt, to settle securities fraud charges related to their alleged deceptive practices and material misrepresentations regarding App Annie’s alternative data.[1]  This was the SEC’s first—but likely not last—enforcement action against an alternative data provider.[2]  In this post, we summarize the SEC’s findings regarding App Annie and Schmitt and consider the implications of the SEC’s investigation for executives, investors, and litigants.

Background: What is “Alternative Data”?

“Alternative data refers to corporate information not found in financial statements and other traditional sources—from satellite images . . . to mobile geolocation data analytics and social media mentions.”[3]  Such data is highly prized by investors.  For example, a hedge fund might buy satellite imagery of mall parking lots, invest in stores with lots of cars in front of them, and reap a handsome reward if those stores announce big quarterly earnings later in the month.[4]  Today, “the way alternative data mostly works . . . is that a lot of people use apps on their mobile phones, and everyone involved in the mobile app business is harvesting data and frantically selling it to each other and to hedge funds.”[5]

Fraudulent Behavior:

Between late 2014 and mid-2018, the relevant period for the SEC’s investigation, App Annie was an important player in the world of alternative date.[6]  App Annie offered app companies free use of its product, “Connect,” which helped companies track the performance of their apps.[7]  For example, Connect could track how often an app was downloaded and how much time users were spending in the app.[8]  In exchange for the otherwise free use of Connect, app makers agreed to allow App Annie to access their confidential data to make estimates of app performance and to then sell those estimates to investors for their use in investment decisions.[9]  Crucially, even though App Annie had access to individualized data showing exactly how an app was doing, it promised to use companies’ data only “in [an] aggregated and anonymized form” to generate estimates of app performance.[10] During the relevant period, over 100 trading firms purchased these estimates and App Annie encouraged those investors to use its estimates to make their investment decisions.[11]

Of course, App Annie’s estimates were only attractive to investors to the extent they were accurate and this created an obvious temptation.  Much as a middle schooler can check the answer to their math problem in the back of the textbook and then work their way backwards to solve the problem, App Annie could consult the precise market data for an app it generated estimates for and then could use that “answer” to improve its estimate of the app’s performance. 

This is exactly what Bertrand Schmitt began to do.  According to the SEC, Schmitt and his “Delivery Team,” a small cohort of engineers in Beijing, began “improving” estimates of app performance by using confidential app data to make manual alterations to the estimates generated by App Annie’s statistical models before selling the altered estimates to investors.[12]  When investors continued to complain about the accuracy of App Annie’s estimates, Schmitt went a step further and introduced an automatic “error-halving” process whereby “if the difference between the estimate generated by the model and the actual performance figure for the app [was too large, Schmitt] cut the difference by half and replaced the model-generated estimate with the more accurate number.”[13]  All the while, Schmitt and App Annie continued to represent that their estimates came from their statistical model and that the company only accessed anonymized, aggregated forms of app data.

The SEC began investigating this behavior and when App Annie learned of the investigation in June 2018, it replaced Schmitt as CEO and discontinued post-model revisions of its estimates.[14]  Schmitt was then fired in 2020 and, as part of the 2021 settlement with the SEC, App Annie agreed to pay a $10,000,000 fine and Schmitt agreed to pay a $300,000 fine and to refrain “from serving or acting as an officer or director of any issuer” for three years.[15] 

Implications for Executives, Investors, and Other Litigants:

The SEC’s App Annie order—while too sparse to fully explain what went wrong at the company—should provide a warning to executives of companies still operating with the move-fast-and-break-things ethos.  The SEC’s order strongly suggests that other executives at App Annie did not understand how Schmitt’s statistical model worked[16] and that the company failed to implement internal compliance controls designed to prevent fraud.[17]  As a matter of sound governance and risk mitigation, senior executives and directors must work to understand their business model and, at minimum, should make the investments in compliance needed to avoid breaking the law.     

Investors that purchase alternative data should also take heed of the App Annie settlement.  While the SEC’s order describes investors who purchased App Annie’s estimates as “unknowing” victims of App Annie’s misrepresentations, any investor who knowingly purchased alternative data that the provider was not authorized to share would expose itself to a securities fraud enforcement action.[18]  

Finally, securities litigants of all stripes should take note of an important and barely discussed premise of the App Annie order.  App Annie and Schmitt were found to have violated Section 10(b) and Rule 10b-5 of the Exchange Act, “which prohibit fraudulent conduct in connection with the purchase or sale of securities.”[19]  App Annie neither purchased nor sold securities.  Rather, it sold estimates to investors, understanding that but for its false representations, investors would neither purchase its estimates not use its estimates to make investment decisions.[20]  A majority of SEC commissioners believed that this behavior constituted fraud “in connection” with the purchase or sale of a security—a prerequisite for the SEC to have jurisdiction over the matter.  However, Hester Peirce—the SEC’s sole Republican commissioner—disagreed.  Back on September 14, she tweeted: “[t]his settlement stretches the ‘in connection with the purchase and sale of securities’ requirement under 10b/10b-5 beyond where I think it should go.”[21]  We will continue monitoring this apparent divide among the commissioners regarding the proper scope of the SEC’s jurisdiction.

[1] Press Release, SEC¸ SEC Charges App Annie and its Founder with Securities Fraud, (Sept. 14, 2021).  App Annie and Schmitt neither admitted nor denied the SEC’s findings and App Annie has since rebranded as   

[2] See id.

[3] Lydia Beyoud & Andrew Romonas, Alt Data Firms Face Heat From SEC, Clients After App Annie Case, Bloomberg Law News Oct. 29, 2021.

[4] Matt Levine,  Money Stuff: Don’t Buy the Bad Data, Bloomberg (Sept. 15, 2021) (describing, “a classic story of alternative data”).  

[5] Id.

[6] In the Matter of App Annie Inc. and Bertrand Schmitt, Administrative Proceeding File No. 3-20549, Litigation Release No. 93975 (Securities and Exchange Commission, Sept. 14, 2021) (“the Order).

[7] Id. ¶ 2. 

[8] Id. ¶ 1. 

[9] Id. ¶¶ 2–3. 

[10] Id. ¶ 2. 

[11] Id. ¶ 15. 

[12] Id. ¶¶ 31­–33.   

[13] Id. ¶¶ 37–40.

[14] Id. ¶¶ 48, 50. 

[15] Id. ¶ 50; Order p. 10­–11.

[16] See Order ¶¶ 28 (noting that Schmitt was “considered the Company’s expert on the statistical model underlying [its] product”); 36, 44 (explaining that Schmitt and his team never explained their manual and automatic alteration processes to App Annie’s other executives).  

[17] Id. ¶ 22 (“[During the relevant period, the Company did not have effective internal controls and did not conduct regular compliance reviews.”). 

[18] See id. ¶ 47. 

[19] Id. ¶ 51 (emphasis added). 

[20] See, e.g., id. ¶ 4.