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The Securities and Exchange Commission (SEC) detected and stopped a Netflix insider trading ring that made more than three million in illegal profits.

On Wednesday, the federal securities regulator said charges have been filed against three former software engineers at Netflix (NASDAQ: NFLX) and their two close associates for illegally trading on confidential information about the company's subscriber growth.

The SEC identified the defendants as former Sung Mo "Jay" Jun,  Aydeen Lee,  Jay Hyeon Bae. They previously worked as software engineers at Netflix. The two other defendants are Joon Mo Jun and Junwoo Chon.

In the complaint, the Commission alleged that Sung Mo Jun was at the center of the Netflix insider trading scheme while he was working at the company and after he left. He allegedly obtained material nonpublic information about Netflix's subscriber growth before the company's quarterly earnings announcements.

Sung Mo allegedly passed the information to his brother Joon Mo, his close friend Chon to trade Netflix securities prior to the company's quarterly earnings announcements between July 2016 and April 2017. They made substantial profits trading Netflix securities based on that information. Chon allegedly paid Sung Mo $60,000 in cash.

After Sung Mo left Netflix, he continued to obtain in advance the company's quarterly subscriber information from his fellow software engineer and friend Ayden Lee. From June 2017 to July 2019, Sung Mo traded Netflix securities and tipped his brother and Chon about the information before that company's quarterly earnings announcements.

In July 2019, prior to Netflix's quarterly earnings announcement, another insider Jay Hyeon Bae tipped Joon Jun about the company's confidential subscriber growth using a group messaging channel.

Sung Mo, Joon Moo, and Chon generated a total of over $3.1 million in illegal profits from trading Netflix based on material, confidential information provided by insiders, according to SEC in the complaint.

SEC Market Abuse Unit used sophisticated analytical tools to detect insider trading schemes

The SEC Market Abuse Unit's Analysis and Detection Center discovered the Netflix insider trading ring using data analysis tools.

In a statement, SEC San Francisco Regional Office Director Erin Schneider said, "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. The charges announced today hold each of the participants accountable for their roles in the scheme."

On the other hand, SEC Market Abuse Unit Chief Joseph Sansone said, "The defendants allegedly tried to evade detection by using encrypted messaging applications and paying cash kickbacks. This case reflects our continued use of sophisticated analytical tools to detect, unravel and halt pernicious insider trading schemes that involve multiple tippers, traders, and market events."

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