The SEC has officially charged three former Netflix (NASDAQ:NFLX) employees with illegal insider trading. The trio once worked as software engineers for the streaming platform and gained access to private information that allowed them to pad their portfolios with Netflix stock.
The primary defendant no longer works at Netflix, but the insider trading allegations are just getting started. Here's why the SEC is charging them, plus how much they made in the operation.
The SEC specifies the use of subscriber numbers at the company, which helped them make decisions on investments. Subscription rates have been a key driver in market cap growth for publicly traded companies that use subscription models, including streaming services like Netflix and Disney.
SEC charges ex-Netflix software engineers with illegal insider trading
According to the SEC, three former software engineers at Netflix participated in an insider trading ring that allowed them to profit off of NFLX stock using confidential information.
Who's part of the insider trading ring?
The SEC says that there are five defendants, including two associates who were not Netflix employees. Of those five, former software engineer Sung Mo "Jay" Jun reportedly led the insider trading operation.
Jun is said to have acquired "non-public information concerning the growth in Netflix's subscriber base, a key metric Netflix reported in its quarterly earnings announcements."
Jun worked at Netflix in 2016 and 2017, but was able to get confidential information about subscriber rates from another employee named Ayden Lee. Another employee, Jae Hyeon Bae, was also involved.
Jun also tipped off his brother and close friend, Joon Mo Jun and Junwoo Chon, two people outside of the Netflix sphere, so they could make trades based on the private data.
When insider trading is illegal
Not all insider trading is illegal. For example, if insiders from a company or government report their trades with the SEC in a timely manner and use semi-public info, it tends to be considered legal. That's why members of Congress are able to get away with trading individual stocks despite their access to news catalysts with limited publicity.
However, if the information the insider uses is still non-public, the SEC has grounds to investigate.
How much did the defendants make in insider trading deals?
Jun, his brother, and his close friend made about $3 million in capital gains through Netflix investments. These trades were based on confidential and illegally acquired data ahead of earnings reports.
Using proprietary technology, the SEC was able to determine that the insiders made improbable returns over a long period of time on NFLX stock.
According to Erin E. Schneider, the SEC's director of the San Francisco Regional Office, "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."
While two of the three Netflix employees did not profit directly off stock like Jun and his associates did, their supposed role in the scheme remains intact.
Despite the news, NFLX stock was up more than four percent in early trading hours on Aug. 19.