Dive Brief:

• The Securities and Exchange Commission has charged three former Netflix software engineers and two associates with generating more than $3 million in illegal profits by trading on confidential information about the company’s subscriber growth.
• The insider ring was identified through the use of a data mining tool the SEC started using about two years ago that looks for patterns that could be reflective of illegal activity. The tool detected the activity even though the trading ring allegedly tried to evade detection by using encrypted messaging applications.
• "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," said Joseph Sansone, chief of the SEC's market abuse unit.

Dive Insight:

Sung Mo Jun, while employed at the company as an engineer, repeatedly tipped upcoming quarterly subscriber growth data — considered a key performance indicator for the company — to his brother and a friend, both of whom used the information to trade in advance of company earnings announcements.

Even after Sung Mo Jun left the company, he obtained, traded on, and shared confidential subscriber growth information from another company insider, Ayden Lee. Another engineer, Jae Hyeon Bae, also is charged with tipping subscriber growth data to Sung Mo Jun after he left.

The “Netflix employee and his close associates engaged in a long-running, multimillion dollar scheme to profit from valuable, misappropriated company information," said Erin Schneider, director of the SEC's San Francisco regional office. 

The SEC's complaint was filed in federal court in Seattle. It charges Sung Mo Jun and the others with violating antifraud provisions of the Securities Exchange Act of 1934.

The defendants 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. 

Separately, the U.S. Attorney's Office for the Western District of Washington has made a criminal filing against Sung Mo Jun and some of the others.