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Netflix is currently under investigation after discovering that three of its former engineers were a part of a long-running insider trading scheme.

Netflix Engineers Part of Trading Scheme

According to the Securities and Exchange Commission or SEC, the three engineers are two close associates who allegedly traded confidential company information, mainly about Netflix's subscriber growth. The trade generated more than $3 million in profit.

Sung-Mo "Jay" Jun allegedly tipped information about the streaming company's subscribers to his brother, Joon Mo Jun, and friend Jun-woo Chon from 2016 to 2017.

Chon used the information to trade ahead of Netflix's earnings announcements. After Sung-Mo Jun left the company in 2017, he continued to get confidential information about the subscriber growth of Netflix from his friend Ayden Lee.

Lee is another Netflix insider and a colleague of another engineer at the company, Jae Hyeon Bae.

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The engineers would use encrypted messaging apps to talk about their trading scheme and avoid detection.

The SEC stated that the agency's Market Abuse Unit eventually flagged the group's trading scheme.

From 2016 to 2019, Netflix enjoyed rapid growth as the price of its stock tripled. It was adding 5 million subscribers a year from 2012 to 2018.

The trading issue came just after Netflix announced that it plans to join the gaming industry and is now looking for a gaming executive to join their team.

In July, Netflix announced the possibility of the company teaming up with Sony to push through with their gaming plan.

Deadline reported that allowing employees access to company information that may be considered sensitive is part of the company's founder Reed Hastings' philosophy. He believes it to be a motivational tool for workers.

In his book "No Rules, Rules," released last year, Hastings said that they are aware that they're the only public company that shares their financial results within the company just weeks before the quarter is closed. 

Hastings wrote that the financial world sees the strategy as reckless, but the information "has never been leaked." He also said that he is anticipating that insider information will be leaked one day, but he is confident that they won't "overreact" and they'll just deal with it and continue with their transparency.

SEC Sues for Shadow Trading

Netflix is not the only company that the SEC has investigated and sued this week. On Aug. 18, the agency accused a biopharmaceutical industry executive of illegally trading a competitor's stock before a merger. The researchers have named this move "shadow trading."

The case alleges Matthew Panuwat, a former Medivation Inc. business development executive, had learned that Pfizer planned to purchase the company in 2016, according to Reuters.

By purchasing call options in competitor Incyte Corp's stock before the announcement was made, Panuwat was accused of insider trading.

The case calls for a fine and to ban Panuwat of any future officer or director position of a publicly traded company.

SEC Director Gurbir Grewal stated that the agency is committed to detecting illicit trafficking in all forms.

In the lawsuit, SEC stated that the company's insider trading policy requires that officers and directors not trade in the company's non-public information. This includes stocks of other companies.

The agency said that Panuwat knew that companies were interested in buying biopharmaceutical companies with commercial-stage drugs, and the acquisition of Medivation would be one of the few targets of the market.

Panuwat allegedly made $107,000 in insider trading.

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Written by Sophie Webster

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