Cyberattack Risk: Not Just For Personal Data

Szpak_Markharrington_sethsullivan_lindsey

by Mark Szpak, Seth Harrington and Lindsey Sullivan

Practice Tips

In August, the United States Department of Justice (“DOJ”) and the Securities Exchange Commission (“SEC”) unsealed complaints alleging a scheme to hack into computer systems of newswire services in order to steal material nonpublic information, which the hackers then allegedly used to place trades.

This case is strikingly different than many other recently reported data-breach cases.  Typically such cases have involved an attacker breaking into a company’s network to access personal nonpublic information (e.g., credit card numbers, medical history, social security numbers) that potentially could be sold to other criminals who would use it to attempt to commit identity theft or fraud.  This hack involved information concerning publicly traded companies, obtained not from the companies themselves, but third-party newswire services.  These complaints highlight that cyberattack risk is not limited to the theft of personal information but extends to any confidential information that hackers may seek to exploit for financial gain – trade secrets, insider information, customer prospects, bid packages, marketing data, business plans, etc. Companies need to understand this risk as well as how to prevent it and manage it if it occurs.

The Alleged Hacking and “Insider” Trading Scheme

The criminal complaints filed by the DOJ allege that nine individuals hacked into the computer systems of newswire services Marketwired, PR Newswire, and Business Wire, accessed nonpublic information, and allegedly used it to generate $30 million in illegal profits.   The civil complaint, brought by the SEC against 32 individuals, alleges that the defendants generated more than $100 million in illegal profits by trading on the stolen nonpublic information in violation of federal antifraud laws and related SEC rules.

These newswire services were engaged by major publicly traded companies to publish corporate releases and, as a result, received confidential information hours and even days before the information was publicly released.  By infiltrating the computer systems of these newswire services, the criminals were able to access – and act upon– the releases ahead of the market.

Few are surprised that the newswire services were targeted, but the extent of the scheme is drawing attention.  The hacking allegedly lasted five years, during which the criminal attackers allegedly accessed over 150,000 press releases.  In one instance, according to the SEC complaint, the hackers and traders were able to act within the 36-minute period between when the press release was provided to the newswire service and public disclosure of the release, executing trades that resulted in $511,000 in profit.

Potential Exposure

Compared to other cybercases, these complaints represent the relatively rare occurrence in which claims are brought against the perpetrators of the data breach and the individuals who seek to use and profit from the stolen information.   As this article goes to press, no litigation is known to have been initiated against either the newswire services or the companies whose information is alleged to have been stolen in this attack.   Yet, based on trends in litigation and regulatory enforcement efforts in matters involving data breaches of personal information, one can expect that claims against hacked entities or their clients may begin also to arise even where only nonpersonal information is involved.

With respect to private litigation, potential claims could face a number of hurdles.  Any potential plaintiff would have to allege a cognizable injury as well as the breach of a duty owed by the defendant to the particular plaintiff.  Many courts in breach cases have dismissed claims (under both tort and contract theories) based on the attenuated relationship between the plaintiff and defendant regarding an alleged duty to safeguard information for the benefit of the plaintiff.  As we move beyond personal information, each new digital information context will raise questions regarding whether a duty to anticipate and protect against criminal cybertheft can be fairly imposed, in what  circumstances, pursuant to what standards, and, if so, to whom is it owed.

With respect to regulators, the SEC has made clear its position regarding the importance of cybersecurity.  In March 2014, Chair Mary Jo White explained that “the SEC have been focused on cybersecurity-related issues for some time” because “[c]yber threats [] pose non-discriminating risks across our economy to all of our critical infrastructures, our financial markets, banks, intellectual property, and, as recent events have emphasized, the private data of the American consumer.”  Other regulators (most notably the FTC) have also staked out a position of overlapping jurisdiction.

Best Practices for Companies

In a world where the electronic landscape and the sophistication of cyberhackers are both moving at high speed, here are nonetheless a few best practices that companies facing an actual or potential data security incident (i.e., all companies) can follow to mitigate potential risk:

  • Think carefully about third-party vendors— Companies rely on numerous third parties for everything from corporate disclosures to marketing advice. Thoughtful contracting and training can go a long way to reducing the risk of loss or misuse.
  • Supplement perimeter detection systems— According to the indictments in the newswire case, the criminal hackers were resident in the victims’ systems for years. The case illustrates the potential significance of taking a “defense-in-depth” approach to security and system monitoring.
  • Be realistic about law enforcement and regulators— Notifying and cooperating with law enforcement can be important for many reasons, and the same is true for governmental regulators.  But law enforcement usually focuses on getting the criminal attacker, while regulators (by comparison) often focus instead on examining any role the company had in having been criminally attacked.  Keeping that difference in mind can be significant in dealing simultaneously with these respective governmental actors.
  • Involve outside experts (both legal and forensic) at the earliest sign of a possible problem— Never guess or assume what may have taken place. Forensic experts can help your team assess whether an attack or breach has occurred, the actual scope of the breach, and how to contain it, while legal experts (both internal and outside counsel) can direct that forensic review and assess potential legal obligations involving notification, public statements, remediation, responding to law enforcement, dealing with regulators, preparing for litigation, and protecting the record.
  • Carefully draft external statements— When an incident occurs, all outward facing statements should be carefully crafted to say only what is necessary, and to avoid committing to specifics until facts are definitely known. Before an incident occurs, promising any level of protection is risky because, if a hacker makes it into the system, the company’s statements will inevitably be second-guessed.
  • Check your insurance— For the sake of planning, assume that erstwhile attackers will be able to access any system in your network. Consider, then, what kind of attack or what kind of data loss could cause the most exposure or disruption.  Then make sure your insurance will actually cover those costs and that any related exposure to liability is indeed included.  Evaluate your incident response preparedness through “tabletop exercises” to confirm that you have identified the potential risks and expenses.
  • Avoid creating a bad record— Preservation of evidence after discovering a data breach often involves much more than just the usual email and paper files. In a network attack, the relevant evidence may include large groups of servers, firewall configuration records, network access logs, security management databases, vulnerability scan results, software hotfix schedules, or any number of other forensic or technical data sources that in most litigation rarely come into play.  Identifying that relevant forensic and technical evidence and then maintaining it, while preserving applicable privileges and minimizing the interruption of critical ongoing company operations, can in many cases pose enormous challenges.

The panoply of costs that a cyberhack can impose make it clear that a well-developed program to secure all types of business information, not just personal information, can provide a competitive advantage.  And when data thieves strike, regardless of the type of data they target, following a prompt and careful response protocol can pay significant legal dividends.

Mark Szpak is a partner in Ropes & Gray’s privacy & data security practice. He focuses on the wide range of challenges that arise after a computer network intrusion, including defending against multidistrict class actions in the U.S. and Canada, handling forensic investigations and responding to regulators.

Seth Harrington, also a partner in Ropes & Gray’s privacy & data security practice, represents clients in all aspects of the response to a privacy or data security incident, and he regularly advises clients on indemnification and insurance matters, including cyber risk insurance.

Lindsey Sullivan is an associate in Ropes & Gray’s business & securities litigation practice, where she focuses on assisting clients through forensic investigations and preservation efforts around privacy and data security breaches.

 

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