When hedge funds and other investors want an edge, they increasingly look to providers of alternative data. One big player in the fast-growing market, App Annie, went too far though in trying to satisfy its customers, according to the U.S. securities regulators.

App Annie, which specializes in mobile app analytics, misrepresented how it would use confidential information obtained from companies, the Securities and Exchange Commission said on Tuesday. Rather than aggregate and anonymize the data as promised, App Annie instead incorporated the full information into its products — which it encouraged clients to use for trading, the agency alleged.

According to the SEC, the data provider also lied to its clients, by telling them its numbers were generated lawfully.

App Annie went to “great lengths to assure customers that the financial and app-related data it sold was the product of a sophisticated statistical model and that it had controls to ensure compliance with the federal securities laws,” SEC official Erin E. Schneider said. “These representations were false and misleading.”

Co-founded by tech entrepreneur Bertrand Schmitt in 2010, the San Francisco-based data firm had been on a steady upward trajectory. In January 2016, it raised $63 million in series E funding, bringing the total funding it had amassed to $157 million. The company is reportedly valued at $457.2 million, has as many as 400 employees, and its annual sales surpass $100 million.

The data firm made a name for itself by providing detailed, timely statistics on things like numbers of app downloads or revenue derived from apps. For instance, last week the company released a forecast showing that consumers will spend $6.78 billion through apps this year, and that number will rise to $17.2 billion by 2025. The company also offered regular public updates on downloads of the voice-chat app Clubhouse, which has since started to fade in popularity.

In details of a settlement released Tuesday, the SEC said that App Annie’s illegal activity occurred from 2014 to mid-2018, while Schmitt was chairman and CEO. (He stepped down as CEO in 2018, and left the chairman role in January 2021.) The former executive was closely involved in the development of the company’s subscription data product, Intelligence, which accounted for substantially all of its revenue, and approved all of its marketing.

“Given the importance to the success of the company, Schmitt was acutely focused on how close App Annie’s Intelligence estimates were to actual app performance figures, as this was the primary way that App Annie could distinguish itself from competitors and increase its subscription revenue,” the SEC said in an enforcement filing.

The company agreed to pay $10 million to end a probe into the alleged violations, without admitting or denying the agency’s findings (a common disclaimer intended to limit further legal fallout from class action suits). Schmitt agreed to pay $300,000 in fines, and consented to a three-year ban on serving as an officer or director of a public company.

The case was the SEC’s first foray enforcement action in the alternative data industry, which was worth $1.72 billion in 2020 and expected to swell to $11.1 billion by 2026. Craftily extracted, collected or scraped from various sources, alternative data offers additional insights that traditional investment research is not likely to show, such as a close-to-real-time view of consumer behavior.

By way of disclaimer, we should note that The Business of Business owner Thinknum is also an alternative data provider.  Thinknum collects its information  — such as job postings, app ratings, and social media chatter — from public sources.

In a statement on his LinkedIn page, Schmitt said he “deeply” regrets that App Annie’s procedures during his tenure as CEO “resulted in an investigation and settlement.” He added that the company “did not actually disclose any customer confidential information or MNPI (material non-public information) outside the company.”

App Annie said it “made a number of material changes to our operations” including appointing Theodore Krantz as its new CEO and revising procedures “to ensure the exclusion of all confidential public company data from the process of generating market data estimates for our Intelligence products.”

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