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Q&A: Akin Gump's Peter Altman, Mike Asaro and Brian Daly on the SEC's App Annie action
2021 PRINDBRF 0498
• Practitioner Insights Commentaries
• November 19, 2021
(November 19, 2021) - Akin Gump partners Peter Altman, Mike Asaro and Brian Daly weigh the significance of the Securities and Exchange Commission's $10 million settlement in September with App Annie Inc., and the enforcement landscape facing buyers and sellers of alternative data.
Thomson Reuters: The SEC's settlement with App Annie Inc. and its founder Bertrand Schmitt arose from the agency's first-ever "alternative data" action. Can you give an overview of the services App Annie provided and to whom?
Peter Altman, Mike Asaro and Brian Daly: As described in the SEC's order, App Annie sold estimates regarding the performance of applications on mobile devices. App Annie marketed this information to trading firms, such as hedge funds and other institutional investors.
TR: The agency alleged that the company and Schmitt violated Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10(b)-5 thereunder. Can you connect the dots between the App Annie's conduct and those provisions?
PA, MA and BD: Section 10(b) and Rule 10b-5 prohibit fraud "in connection with the purchase or sale of securities." According to the SEC, App Annie defrauded two parties in connection with its services. First, App Annie obtained app performance data from app sponsors based on the false representation it would aggregate and anonymize the app performance data it collected before using that data to provide estimates to its subscribers. Second, App Annie falsely represented to its trading firm subscribers that it generated app performance estimates in a manner that was consistent with the consents obtained from app sponsors.
The SEC order states that, in fact, App Annie secretly made its estimates more accurate by applying adjustments based on data that was not anonymized or aggregated. The SEC found that these were material misrepresentations "in connection with the purchase or sale of securities" because App Annie knew and actively encouraged its clients to trade securities based on the estimates it was selling.
TR: What is "alternative data," and what are some other examples of it in the marketplace?
PA, MA and BD: The SEC's order in the App Annie action defines "alternative data" broadly as "information about companies or investments that is not contained within financial statements or other traditional data sources." Taken at face value, you could argue that this definition captures almost any form of data that can't be found in a public company's SEC filings.
That said, the app performance data in the App Annie case is a good example of something typically considered alternative data. Other examples could include unstructured data obtained from the internet through automated programs that engage in "web-scraping" or data showing the number of units of a particular product that have been purchased through an automated payment platform or credit card service.
TR: Based on the App Annie settlement, are there some types of alternative data that might be more likely to trigger SEC scrutiny?
PA, MA and BD: The SEC's focus is more likely to be on how the data was obtained before it was resold. If a vendor lies to someone to get them to share their sensitive data and then resells it to investors for securities trading purposes, the SEC will likely be interested in that case. Put another way, it's the means by which the data was obtained and whether it was monetized through securities trading that is likely to drive the next case, as opposed to the particular type of data.
TR: Commissioner Hester Peirce stated that the settlement "stretches the 'in connection with the purchase or sale of securities' requirement" for bringing a claim under Section 10(b) of the Exchange Act. Is that a point of view that's shared? Is it likely to get any traction among regulators?
PA, MA and BD: Commissioner Peirce correctly acknowledged in her tweet that the SEC's settled order in App Annie arguably stretched the boundaries of Section 10(b)'s "in connection with the purchase or sale of securities" requirement. If the next enforcement action by the SEC in this space isn't settled, a judge may or may not agree with the SEC's position in the App Annie case.
However, the fact that the App Annie settlement was approved means that Commissioner Peirce is in the minority. With the current slate of commissioners at least, we're likely to see the Enforcement Division pursue similar actions in the future.
TR: What does the action against App Annie — a company that provided alternative data — mean for users of alternative data?
PA, MA and BD: In the App Annie action, the subscribers were identified as victims of the fraud. I think users of alternative data can take some comfort in this. It means the SEC is not looking to penalize investment firms that have a good-faith belief, based on reasonable diligence, that the alternative data they are purchasing was obtained appropriately.
However, if the facts here were different and the consumers of the data, for example, willfully disregarded red flags, they could have easily become defendants.
The question the App Annie case does not answer is this: What sort of diligence investment firms should do going forward if they want to use an alternative data vendor? This is an area where we — and a lot of other law firms — are actively advising our clients right now.
TR: Might the enforcement action have repercussions outside of the alternative data landscape?
PA, MA and BD: It's hard to say. Right now, the immediate impact appears to be on the compliance practices of alternative data vendors and their subscribers in the investment community.
TR: Can you share any thoughts about the what the future might hold for enforcement actions involving alternative data, and how it might be regulated?
PA, MA and BD: As a follow-up to the App Annie case, the SEC appears to be focused on the policies and procedures that investment advisers have in place to diligence alternative data vendors. There are specific regulations in place that require investment advisers to have reasonably designed compliance procedures, which could come into play here.
If the SEC finds situations where investment advisers utilize alternative data without having sufficient procedures and the provider of the data engages in App Annie-like conduct, we could see enforcement actions based on these regulations, which have a lower bar for the government to establish a violation than Rule 10b-5.
Peter Altman is a partner in Akin Gump's white collar defense and government investigations practice group in Los Angeles. He represents investment management firms, private and public companies, and individuals in white collar and other government enforcement and regulatory matters, securities class litigation and internal investigations. He can be reached at [email protected]. Mike Asaro is a partner and co-head of the white collar defense and government investigations practice group in New York. He focuses on white collar criminal defense, SEC and CFTC investigations, corporate internal investigations and complex commercial litigation. He can be reached at [email protected]. Brian Daly is a partner in the firm's investment management group in New York. He advises fund managers on regulatory, compliance and operational matters. He has extensive experience helping clients navigate their regulatory compliance obligations under the rules and regulations of the SEC, CFTC and NFA. He can be reached at [email protected].
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