Friday, March 24, 2023

Three Former Netflix Software Engineers Charged With Insider Trading By SEC

Three former Netflix software engineers have been charged by the U.S. Securities and Exchange Commission for insider trading

In a complaint filed in federal court in Seattle, the regulatory agency alleges that the engineers and two associates generated more than $3 million in profits from a “long-running scheme.” The cornerstone of the setup, according to the complaint, was confidential information they obtained about Netflix subscriber growth. Subscriber numbers, whether at Netflix or, more recently, Disney, AT&T and other companies, have been central to Wall Street’s embrace or rejection of stocks in recent years.

The SEC’s complaint, Sung Mo “Jay” Jun was at the center of a long-running scheme to illegally trade on non-public information concerning the growth in Netflix’s subscriber base. The complaint alleges that Sung Mo Jun, while employed at Netflix in 2016 and 2017, repeatedly tipped this information to his brother, Joon Mo Jun, and his close friend, Junwoo Chon, who both used it to trade in advance of multiple Netflix earnings announcements.

Sensitive, internal information is disclosed to Netflix employees frequently, and by design. As founder and Co-CEO Reed Hastings explained in his 2020 book, No Rules Rules, the company aims for transparency in order to keep workers motivated. “We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed,” he wrote. “The financial world sees this as reckless. But the information has never been leaked. When it does one day leak (I imagine it will), we won’t overreact. We’ll just deal with that one case and continue with transparency.”

After Sung Mo Jun left Netflix in 2017, the complaint says, he obtained confidential Netflix subscriber growth information from another Netflix insider, Ayden Lee. Sung Mo Jun allegedly traded himself and tipped Joon Jun and Chon in advance of Netflix earnings announcements from 2017 to 2019. The SEC alleges that Sung Mo Jun’s former Netflix colleague Jae Hyeon Bae, another Netflix engineer, tipped Joon Jun based on Netflix’s subscriber growth information in advance of Netflix’s July 2019 earnings announcement.

The SEC said its market abuse unit uncovered the trading ring by using data analysis tools to identify the traders’ improbably successful trading over time.

“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,” Erin E. Schneider, director of the SEC’s San Francisco office, said in a press 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.”

Sung Mo Jun, Joon Jun, Chon, and Lee have consented to the entry of judgments which, if approved by the court, would permanently enjoin each from violating the charged provisions, with civil penalties, if any, to be decided later by the court. Sung Mo Jun also agreed to an officer and director bar. Bae consented to the entry of a final judgment, also subject to court approval, permanently enjoining him from violating federal laws and imposing a civil penalty of $72,875.

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington filed a criminal information against Sung Mo Jun, Joon Jun, Chon, and Lee.


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