October 23, 2021

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SEC sues three former Netflix engineers over insider trading

Netflix Inc updates

The Securities and Exchange Commission has sued three former Netflix engineers over insider trading, alleging they made more than $3m in profits by trading on subscriber numbers before they were released publicly.

As the entertainment business has moved towards streaming rather than traditional television, subscriber growth has become the most important metric for Wall Street in deciding whether to buy or sell media stocks.

Netflix stock can be notably volatile in the days after earnings, depending on whether it added more or fewer subscribers than forecast.

According to the SEC complaint filed in federal court in Seattle on Wednesday, engineer Sung Mo Jun, while working for Netflix in 2016 and 2017, tipped off his brother and a friend with subscriber information. They then used it to trade ahead of Netflix earnings announcements.

The SEC also alleges that even after leaving the company in 2017, Mo Jun managed to obtain Netflix subscriber information from Ayden Lee, another Netflix engineer. Mo Jun used it to trade Netflix stock himself from 2017 to 2019, according to the complaint.

Another former Netflix engineer, Jae Hyeon Bae, was also charged for leaking Netflix subscriber numbers to Mo Jun’s brother ahead of the company’s July 2019 earnings release. The company that quarter reported its first drop in US subscribers since 2011, wiping more than $15bn from Netflix’s market value — the worst decline in its stock price in three years.

Erin Schneider, director of the SEC’s San Francisco office, said the group “engaged in a long-running, multimillion dollar scheme to profit from valuable, misappropriated company information”.

The SEC has charged the three former staffers with violating antifraud provisions. The charges would “hold each of the participants accountable”, said Schneider.

Reed Hastings, Netflix chief executive, has made transparency a part of the company’s unconventional corporate culture. The company shares financial results with “seven hundred or so” employees ahead of its earnings release.

“We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed,” Hastings said in his book, No Rules Rules: Netflix and the Culture of Reinvention.

“The financial world sees this as reckless. But the information has never been leaked,” he wrote in the book, which was released last year.

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