The US Securities and Exchange Commission has charged five individuals with insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder. Three of the individuals, Sung Mo Jun, Ayden Lee, and Jae Hyeon Bae, are former software engineers at Netflix, Inc. a subscription-based video streaming company headquartered in California. The other two, Joon Mo Jun and Junwoo Chon, are the brother of one of the engineers and a close friend of the former.
According to the complaint, between July 2016 and February 2017, Sung Mo Jun shared confidential Netflix subscriber information with his brother Joon Mo Jun and the latter’s friend, Junwoo Chon, in advance of Netflix’ earnings announcements, despite knowing or recklessly ignoring the duty he owed to Netflix to preserve the confidentiality of that material nonpublic information. The SEC alleges that Sung Jun conveyed the information to his brother and friend with the expectation that they would trade Netflix securities based on that information. Joon Jun and Chon used the information to purchase stock options, placing identical trades within minutes of one another, communicating with one another through an encrypted messaging application, and profiting by $215,000 and $521,000 respectively. As alleged by the SEC, Chon paid Sung Mo Jun $60,000 of his trading profits as payment for the material nonpublic subscriber information.
The SEC further alleges that, following Sung Mo Jun’s departure from Netflix in 2017, Netflix engineer Ayden Lee tipped Sung Mo Jun with confidential subscriber information, enabling Sung Mo Jun to continue to provide the information to Joon Jun and Chon, who traded on the material nonpublic information through July 2019, resulting in a profit of approximately $453,000 to Sung Mo Jun, $813,000 to Joon Jun, and $1.1 million to Junwoo Chon.
The fifth individual, Netflix software engineer Hyeon Bae, is alleged to have advised Joon Jun to sell his Netflix shares in advance of the July 2019 earnings announcement, which Bae understood from Netflix confidential subscriber information to be below expectations set by market analysts. According to the complaint, both Bae and Joon Jun knew that the subscriber data constituted material nonpublic information, that Bae was breaching his duty to Netflix by tipping Joon Jun, and that it was improper for Joon Jun to conduct stock trades based on the information. Profits of $472,875 were generated by the improper trades.
The SEC seeks to enjoin the defendants from further violations of Section 10(b) and Rule 10b-5, to bar Sung Mo Jun from acting as an officer or director of exchange-registered companies, and to impose civil penalties on all five defendants.
Criminal charges were also filed against Chon, Sung Mo Jun, Joon Jun, and Ayden Lee in US District Court for the Western District of Washington. Chon pleaded guilty to securities fraud (insider trading) in violation of 15 USC §§ 78j(b) and 78ff, and 17 CFR §§ 240.10b-5 and 240.10b5-1.