Ex-Netflix Employees Accused of $3.1 Million Insider Trading Scheme

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Five people, including three former Netflix employees, used confidential subscriber growth information to illegally trade in Netflix stock, netting $3.1 million, according to a Securities and Exchange Commission complaint filed on Wednesday.

Sung Mo “Jay” Jun, 49, of Bellevue, Wash., and three others have also been criminally charged in federal court in Seattle with three counts of insider trading. All four have agreed to plead guilty.

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Each of the four defendants, as well as a fifth person, were charged with civil counts of insider trading by the Securities and Exchange Commission. All five have likewise waived their right to a trial and agreed to a civil judgment, with the penalties to be determined by the court.

Jun worked as a software engineer at the company from 2013 to 2017. According to the SEC complaint, he tipped off his brother, Joon Mo Jun, and a close friend, Junwoo Chon, about the company’s subscriber growth numbers in advance of Netflix’s quarterly earnings announcements.

The SEC alleges that Joon Mo Jun and Chon used that information to trade on Netflix stock on four occasions in 2016 and 2017. Chon made $521,000 from these illicit trades, of which he shared $60,000 with Sung Mo Jun, according to the complaint. The complaint also states that Joon Mo Jun made $215,000.

Also charged was Ayden Lee, 33, of San Jose, who worked as a software engineer at Netflix from 2016 to February 2021, and who considered Sung Mo Jun to be a mentor at the company. The complaint alleges that after Sung Mo Jun left the company in 2017, he repeatedly asked Lee to provide him with confidential subscriber numbers. Lee did so through 2019, according to the complaint.

Jun then passed that information to his brother and to his friend, according to the SEC complaint. In that time period, Chon made another $1.1 million, Sung Mo Jun made $453,000, and Joon Mo Jun made another $813,000 on illicit trades ahead of nine quarterly announcements, according to the SEC.

The SEC said that it discovered the illicit transactions using its data analysis tools, which picked up on the group’s “improbably successful” trading patterns. The agency also said that the defendants used encrypted messaging to try to evade detection.

Sung Mo Jun was also friends with a third Netflix employee, Jae Hyeon Bae. The SEC alleges that Bae, Chon, Joon Mo Jun and Sung Mo Jun participated in a messaging channel called “Rage Against the Market,” in which they discussed stock trades. In one of these discussions, according to the SEC, Bae advised Joon Mo Jun to sell Netflix shares, knowing that Netflix’s subscriber growth would come in below the analysts’ forecast. The SEC alleges that that tip helped Joon Mo Jun net $72,875.

Bae, who left the company in 2019, was not charged in the criminal case, though he is charged in the SEC complaint.

Chon appeared on Wednesday afternoon in federal court in Seattle and pleaded guilty to a single count of insider trading. He remains out of custody, and his sentencing was set for Dec. 3. In a statement, his attorney said that Chon is a naturalized citizen, originally from South Korea, who has lived in the Puget Sound area since 1988 and has never previously been involved in criminal conduct.

“A few years ago Mr. Chon received an inheritance, which put him in the position of being able to make significant investments in the stock market for the first time,” said the attorney, Christopher Black. “He lacked experience and perspective and ended up making the poor choices described in the various court documents filed in these matters. Mr. Chon has been cooperative with the government since he was first approached by the FBI last year, and has agreed to resolve both the criminal case and the SEC case that have been brought against him. He acknowledges the poor decisions he made, and is taking responsibility for them. He looks forward to putting this chapter in his life behind him.”

Attorney Todd Williams, who represents Joon Mo Jun, also issued a statement on his behalf: “Joon Jun has accepted responsibility for his actions detailed in the information filed by the Government. He is looking forward to resolving this matter and moving on with his life.”

Lee’s attorney, David Callaway, noted that his client had not profited from the scheme.

“Ayden is a young engineer who was taken advantage of by an older, more experienced former colleague whom he considered to be a mentor and friend,” Callaway said in the statement. “Ayden never traded on inside information, nor did he receive any ‘cash kickbacks’ or other remuneration from Mr. Jun for the information he provided. Nevertheless, Ayden is taking full responsibility for his actions and looks forward to putting this mistake (which he made having scarcely passed his 30th birthday) behind him and moving forward with his life.”

As noted by Deadline, Netflix co-founder and co-CEO Reed Hastings published a book in 2020, “No Rules Rules: Netflix and the Culture of Reinvention,” in which he bragged that the company shares its results with hundreds of employees ahead of the quarterly announcements.

“We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed,” Hastings wrote. “We announce these numbers at a quarterly business review meeting with our top seven hundred or so managers. 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.”

Spencer Wang, the VP of investor relations, is quoted in the book as saying that the subscriber number is “top secret” and could be used by investors to “make a lot of money,” and that anyone at Netflix who leaked it could go to jail.

Wang said that during his first week in the company, he was shocked to receive an email with the subscriber number included, and he asked the CFO how many people had access to it.

“His response was crazy,” he is quoted as saying. “‘Any employee can sign up for it. It’s open to everyone in the company who’s interested.'”

Netflix declined to comment.

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