UPDATED: One of the three former Netflix software engineers charged with insider trading by the Securities and Exchange Commission has plead guilty.
Sung Mo Jun, 49, and his brother Joon Jun, 45, pleaded guilty today in U.S. District Court in Seattle to securities fraud stemming from their roles in an insider trading ring that they say generated more than $1 million in illegal proceeds, according to Acting U.S. Attorney Tessa M. Gorman.
The plea agreement states that when he was employed by Netflix the elder Jun disclosed confidential company information to his brother as well as close friend Junwoo Chon, 50. Chon then traded on that information, making “significant profits,” according to the plea. Chon secretly gave Sung Mo Jun $60,000 in return, says the document.
After Jun left Netflix, he received non-public subscriber information from software engineer Ayden Lee, 33, the agreement further states. The document says Jun’s own trades made him a profit of $434,086, while his brother made $215,419 and co-conspirator Junwon Chon made $521,400. The total documented “illicit gain” from those transactions adds up to $1,170,905.
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The plea agreement further states: “Joon Jun is responsible for illicit profits of $1,106.208. Chon is responsible for illicit profits of $1,642,855, and Lee is connected to illicit profits of $453,465.”
Chon pleaded guilty earlier this month. Lee’s plea hearing has not yet scheduled.
PREVIOUSLY on August 18: Three former Netflix software engineers are among those who have been charged by the U.S. Securities and Exchange Commission for alleged insider trading.
In a complaint filed in federal court in Seattle, the regulatory agency says the engineers and two associates generated more than $3 million in profits from a “long-running scheme.” The cornerstone of the setup, according to the complaint, was confidential information they obtained about Netflix subscriber growth. Subscriber numbers at Netflix or, more recently, Disney and other companies, have been central to Wall Street’s embrace or rejection of stocks in recent years.
The SEC’s complaint, Sung Mo “Jay” Jun was at the center of a long-running scheme to illegally trade on non-public information concerning the growth in Netflix’s subscriber base. The complaint alleges that Sung Mo Jun, while employed at Netflix in 2016 and 2017, repeatedly tipped this information to his brother, Joon Mo Jun, and his close friend, Junwoo Chon, who both used it to trade in advance of multiple Netflix earnings announcements.
Sensitive, internal information is disclosed to Netflix employees frequently, and by design. As founder and Co-CEO Reed Hastings explained in his 2020 book, No Rules Rules, the company aims for transparency in order to keep workers motivated. “We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed,” he wrote. “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.”
After Sung Mo Jun left Netflix in 2017, the complaint says, he obtained confidential Netflix subscriber growth information from another Netflix insider, Ayden Lee. Sung Mo Jun allegedly traded himself and tipped Joon Jun and Chon in advance of Netflix earnings announcements from 2017 to 2019. The SEC alleges that Sung Mo Jun’s former Netflix colleague Jae Hyeon Bae, another Netflix engineer, tipped Joon Jun based on Netflix’s subscriber growth information in advance of Netflix’s July 2019 earnings announcement.
From 2016 to 2019, Netflix’s stock price more than tripled as the company expanded globally and saw its total subscriber base increase exponentially. In the past couple of years, facing increased competition, its growth has not been as explosive in all parts of the world, but it remains the leader in streaming with 209 million paying customers.
The SEC said its market abuse unit uncovered the trading ring by using data analysis tools to identify the traders’ suspicious run of success.
“We allege that a Netflix employee and his close associates engaged in a long-running, multimillion dollar scheme to profit from valuable, misappropriated company information,” Erin E. Schneider, director of the SEC’s San Francisco office, said in a press release. “The charges announced today hold each of the participants accountable for their roles in the scheme.”
The defendants allegedly tried to evade detection by using encrypted messaging applications and paying cash kickbacks,” added Joseph Sansone, Chief of the SEC’s market abuse unit.
Sung Mo Jun, Joon Jun, Chon, and Lee have consented to the entry of judgments, the SEC said. If approved by the court, the judgments would permanently enjoin each from violating the charged provisions, with civil penalties to be decided later by the court. Sung Mo Jun also agreed to an officer and director bar. Bae consented to the entry of a final judgment, also subject to court approval, and imposing a civil penalty of $72,875.
In coordination with the SEC complaint, the U.S. Attorney’s Office for the Western District of Washington filed a criminal information against Sung Mo Jun, Joon Jun, Chon, and Lee. An information is a formal charging document outlining the criminal charges against a person. Unlike an indictment, it does not require a grand jury’s vote.