Category Archives: Network Security

Do ICOs have any future?

On February 6, 2018, the Senate Committee on Banking, Housing, and Urban Affairs met in open session to conduct a hearing entitled, Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.  The Honorable Jay Clayton, Chairman, U.S. Securities and Exchange Commission and The Honorable J. Christopher Giancarlo, Chairman, U.S. Commodity Futures Trading Commission provided lengthy and thoughtful prepared statements.  In his statement, Chairman Clayton explained why the SEC was devoting significant resources to ensure ICO founders do not skirt SEC’s regulatory oversight of security offerings and Chairman Giancarlo reaffirmed that the CFTC will similarly enforce its regulations on commodities.

Their testimony provides helpful insight regarding the enforcement direction these agencies will take in the coming months.  According to Chairman Clayton, in 2017 there was $4 billion raised in ICOs -with an unknown amount being sold in the US.   He was generally “very unhappy with ICOs” and mentioned that the SEC was “working the beat hard” to crack down on them.  Accordingly, ICOs are in the “crosshairs of enforcement” and tellingly he testified that “every ICO [he has] seen is a security” subject to enforcement.  This testimony is consistent with prior SEC pronouncements given that  Chairman Clayton previously requested that the SEC’s Enforcement Division “vigorously” enforce and recommend action against ICOs that may be in violation of the federal securities laws.   During his testimony, Chairman Clayton repeated several times that the SEC would continue to “crack down hard” on fraud and manipulation involving ICOs offering an unregistered security.

According to Chairman Clayton, the definition of a security is broad and will turn on whether someone can profit from efforts going forward by buying the token and then trade it with someone else for further profit.  Both Chairmen recognized that no one agency has any direct oversight of virtual currencies and welcomed efforts from Congress to draft new legislation that would help with their coordination efforts.

In probably the most interesting exchange during their two-hour testimony, Senator Mark Warner of Virginia recognized that the SEC went after certain ICO promoters but not others so directly asked Chairman Clayton whether the SEC “will go back [to scrutinize prior ICOs]?”  Correctly avoiding that question – given it requests insight as to future SEC enforcement efforts, Chairman Clayton instead offered that the SEC is counting on lawyers and accountants to also act as “gatekeepers” for future ICOs.

Chairman Clayton’s testimony came on the heels of the SEC’s Cease and Desist Order in the Munchee, Inc. matter that may have closed the lid on many planned 2018 ICO’s given the stringent standard set forth in that SEC Order.  By way of background, Munchee created an iPhone application for people to review restaurant meals.  In October and November 2017, Munchee offered and then sold purported utility tokens issued on the Ethereum blockchain.  “Munchee conducted the offering of MUN tokens to raise about $15 million in capital so that it could improve its existing app and recruit users to eventually buy advertisements, write reviews, sell food and conduct other transactions using MUN.”  Order at 1.

In deeming the MUN utility token a “security” subject to SEC oversight, the SEC made the following finding of fact in its December 11, 2017 Order:

Purchasers had a reasonable expectation that they would obtain a future profit from buying MUN tokens if Munchee were successful in its entrepreneurial and managerial efforts to develop its business. Purchasers would reasonably believe they could profit by holding or trading MUN tokens, whether or not they ever used the Munchee App or otherwise participated in the MUN “ecosystem,” based on Munchee’s statements in its MUN White Paper and other materials. Munchee primed purchasers’ reasonable expectations of profit through statements on blogs, podcasts, and Facebook that talked about profits.

Order at 5.

There remains hope for future ICOs given that the SEC is certainly not going after them all.  One ICO left untouched by the SEC was “gate keeped” by Perkins Coie and involves an ICO for an Ethereum utility token that raised $35 million in under a minute’s time.   See FAQ (“We and our counsel at Perkins-Coie are confident that the Basic Attention Token is properly classified as property with utility on the platform we are building, and not a security.”).  Given the subsequent Munchee C&D Order, it is unclear why the SEC does not “go back” to this ICO as suggested by Senator Warner.

The founders of Brave Software launched the “Basic Attention Token” in May 2017 seeking to improve on the current digital advertising ecosystem:   “Digital advertising is broken [with] unprecedented levels of malvertisements and privacy violations.”  The BAT token looks to fix this broken system by creating an ecosystem tied to consumer attention – which is why it is called the “Basic Attention Token”.  Such ecosystem would certainly be an upgrade from the current digital advertising scheme based on the Web ecosystem of 1995.  BAT tokens can only derive long term value by way of the Brave® Browser.   As set forth by a marketing blogger, “If Brave isn’t adopted, the new advertising structure won’t work.”

By successfully obtaining registered trademark No. 5,362,328 for BRAVE – a mark used to distinguish Brave Software’s “web browser software”, the founders of the BAT token demonstrate ownership rights in the Brave browser, that they are the source of such product, and that they will be the direct cause of the browser’s success.  In other words, buyers of the BAT ICO would necessarily profit from the efforts of Brave Software, Inc.   On the other hand, there remains utility to the BAT token.  Moreover, a utility token will likely always be at least remotely tied to the efforts of its founders – there is little reason to believe a token left in the wild would hatch into anything of value.  The fact that the SEC has not scrutinized the BAT ICO is actually an encouraging sign the SEC will temper its enforcement actions when faced with a disruptive blockchain initiative that begets true intrinsic value in the token.

State and Private Enforcement of ICO schemes

In addition to existing federal enforcement, state agencies are also cracking down on ICOs.  For example, on January 17, 2018, the Massachusetts Securities Division filed an administrative complaint against a Cayman Islands company given that the company operated out of Massachusetts and its ICO offered for sale “a security without such security being registered or exempt from registration.”  Complaint at 2.

And, to the extent state regulatory oversight may be lacking, states will try and enlarge regulatory reach by enacting new laws.  For example, California introduced a year ago the Virtual Currency Act (A.B. 1123), which would have required those involved in a “virtual currency business” within the state to register with California’s Commissioner of Business Oversight.  Even though this attempt at regulating cryptocurrencies died on January 31, 2018 due to political pressure, it may come back in a different from.    Interestingly, there was a carve out in the bill for any “virtual currency business” when it uses “[d]igital units that are used exclusively as part of a consumer affinity or rewards program”.

Class action counsel has also impacted ICOs by directly suing ICO founders in order to recoup millions for class participants.  One recent case is Davy v. Paragon Coin, Inc., et al., Case No. 18-cv-00671 (N.D. Cal. January 30, 2018).  Plaintiff class counsel sued Paragon based, in part, on the Paragon white paper characterizing its PRG token as potentially increasing in value simply based on the reduction of supply and an increase in demand.  Moreover, the paper suggests that “PRG is designed to appreciate in value as our solutions are adopted throughout the cannabis industry and around the world.”  Id. at 31.  In other words, the efforts of the founders would directly generate a more profitable investment result from the ICO.

Another ICO class action fraud case was filed in Paige v. Bitconnect Intern. PLC, et al., Case No. 3:18-CV-58-JHM (W.D. Ky. January 29, 2018).  The plaintiff’s claim of a Ponzi scheme was so strong it resulted in a TRO from the Court a day after filing suit.  Any future ICO that results in a loss in value to “investors” will likely trigger class counsel to spring into action.

The future of ICOs remains viable

Where does this trifecta of enforcement efforts – federal, state and private, leave ICOs?  If bankers are to believed, there is currently not much “there”, there.   In a report dated February 5, 2018, Goldman Sachs Group Inc.’s global head of investment research suggests that investors in ICOs could possibly lose their entire investments.  Goldman’s Steve Strongin said that while he did not know a timeframe for total losses in existing coins and tokens, he ruminated:  “The high correlation between the different cryptocurrencies worries me. . . Because of the lack of intrinsic value, the currencies that don’t survive will most likely trade to zero.”

Given the disruptive nature of ICOs on the IPO and private equity markets, it is not surprising that the global head of Goldman downplays the future of ICOs – even if he is correct in pointing out  the lack of intrinsic value in most every utility token and coin offered in an ICO.  Notwithstanding current enforcement actions and competition from traditional markets, the future for ICOs should remain viable.  Moving forward, the key to a viable and “compliant” ICO will be whether the ICO is conducted for a utility token having  demonstrated intrinsic value connected to the activities of those other than merely the ICO’s founders.

Blockchain in 2018 and beyond

Buoyed by Bitcoin’s latest price and a steady supply of Initial Coin Offerings (ICOs), the blockchain ecosystem in 2018 resembles the Web ecosystem of 1995 – an ecosystem that eventually disrupted advertising and marketing models by having companies such as Amazon, Google and Facebook outplace traditional retail sales and marketing companies.  This time around, however, the financial levers presently held by banks and related financial services firms will be retooled – as well as the present centralized server model so very important to the same companies who previously benefited from the Web ecosystem, namely Amazon, Google and Facebook.

Speculation vs. Utilization

in September 2017, Bitcoin was famously derided by the financial titan Jamie Dimon as “a fraud”.  The JPMorgan CEO went so far as to say he would fire anyone on his trading team who bought Bitcoin.  His gratuitous digs at Bitcoin did not temper the rise of Bitcoin and became noteworthy – and a likely source of friction with his traders, because the Bitcoin cryptocurrency went on to increase in value over three-fold a mere 1Q after Dimon’s public derision.   As of December 31, 2017, Bitcoin sits at a price of near $14,000 whereas when Mr. Dimon’s bold pronouncements were made Bitcoin “only” had a price of $4,115.

Similarly, another banker – Vitor Constancio, the vice president of the European Central Bank, said in July 2017 that Bitcoin “is not a currency but a mere instrument of speculation” – comparing it to tulip bulbs during the 17th century trading bubble in the Netherlands.

In the same way that the World Wide Web was never defined solely by, the benefits of blockchain technology should never be defined solely by the latest price of Bitcoin.  Even Mr. Dimon acknowledges as much given during his tirade against the speculative nature of Bitcoin he also said “he supported blockchain technology for tracking payments.”

By way of background, a blockchain is nothing more than an expandable list of records, called blocks, which are linked and secured using cryptography, namely cryptographic hashes that point to each prior block and result in an unbreakable “chain” of hashes surrounding the blocks.  More accurately referred to as a distributed ledger of accounts, a blockchain ecosystem will disrupt more than one industry beginning in 2018.

The inevitable changes that will occur in 2018 spring from several unique attributes of the blockchain ecosystem.  First, because a blockchain ledger is distributed it takes advantage of the vast amount of compute power available in most every computer device.  Similar to how the Mirai botnet distributed denial of service (DDos) attack became the largest DDoS attack by simply using unsecured IoT access, blockchain technology harnesses secure unused compute power in powerful and productive new ways.  Our new IoT ecosystem – which itself is an outgrowth of the Web ecosystem, will only feed into that result.

Secondly, blockchain ledger transactions are the closest thing to an immutable form of transaction accounting we have given the transactions have been verified and cannot be changed once written to the blockchain without evidence of obvious tampering – which was always the reason Bitcoin derived any actual intrinsic value.  In other words, the promise of blockchain coupled with pure speculation has solely driven Bitcoin pricing.  By buying Bitcoin and other cybercurrencies, it is almost as if people were given a chance to turn back the clock and bet on the Web ecosystem in 1995.  Without usage for its intended purpose, namely being a trusted and immutable listing of Bitcoin transactions, Bitcoin would most certainly go to the zero valuation postulated by Morgan Stanley.  The logic is pretty straight forward – without an actual intrinsic store of value, there is no actual intrinsic store of value.  And, without some sort of intrinsic store of value there is no reason to consider Bitcoin an asset.  Accordingly, unless utilized by choice or forced to be used by a government, speculation will never be a sustainable impetus for the pricing of Bitcoin – or any other cryptocurrency for that matter.  Without utilization, tokens/app coins/cryptocurrencies will all die on the vine given external utilization will always be needed to create a store of value.

Utilization under the Ethereum protocol

Disregarding the unlikely scenario of governmental adoption, the future of any blockchain/cryptocurrency ecosystem necessarily ties directly to utilization.  Even though there are several protocols with smart contracts amendable to utilization, there is only one founded by a visionary who understands the issue of scalability and why scalability is the sine qua non of a successful blockchain ecosystem – in the same way a non-scalable Web ecosystem was always a non-starter.  An early December 2017 presentation given by that visionary – Vitalik Buterin,  talks to scalability as being the most important new initiative of Ethereum going forward in 2018.   Mr. Buterin – who will likely take the blockchain ecosystem where Gates took the PC ecosystem and Bezos took the Web ecosystem, suggests that “sharding” using a Validator Manager Contract –  a construct that maintains an internal proof of stake claim using random validators, will eventually solve the problem of scalability.  Simply put, not all blocks/shards will need to be placed under the main chain.  This is a natural evolutionary progression given as it stands now everyone seeking an Ethereum wallet needs to download Ethereum’s entire trove of over four million blocks – hardly a scalable solution for the many app tokens or coins running the Ethereum protocol.  Moreover, each Ethereum block currently also takes about 14.70 seconds to promulgateIn 2014, Buterin anticipated the feasibility of a 12 second block time so has certainly been moving in the right direction.  Given security and propagation issues, work on this remains in the infancy stage with a great deal of work necessary in 2018.  Nevertheless, in 2018 and beyond, smart contracts such as those available under Ethereum will allow for the utilization necessary for the blockchain ecosystem to thrive.

Adoption by financial markets and the Ripple Effect

Ripple/XRP surged at the very end of 2017 and quickly became a rumored stealth initiative by the regulated banking industry to combat unregulated cryptocurrencies.  Ripple promises “end-to-end tracking and certainty” for those banks using its RippleNet closed-loop network.  More than anything, this initiative demonstrates that unregulated ICOs and unregulated “currencies” may have spooked the world’s financial markets sufficiently to justify taking sides by investing in a Ripple contender – a “blockchain-like” service seeking to displace existing cryptocurrency mindshare.  Indeed, Ripple just replaced ETH/Ethereum as the second largest market cap cryptocurrency.   Even though only three financial institutions are listed as investors, that does not mean other financial institutions would not want to prop up use of this “currency” on the open market – the list of “advisory board members” is telling in that regard.  This bank-sponsored cryptocurrency certainly looks like it has more legs than most given there exists budding utilization – banks are currently already using the RippleNet network, coupled with massive speculation given its ballooning market cap.

In 2018, acceptance of blockchain technology by the financial industry will be indelible proof those mistakes of 1995 made by retail sales and marketing companies will not be repeated by the financial industry or even the server sector represented by the likes of Google – who has invested in Ripple.  More than likely, upcoming technology developments under the Ethereum protocol will beget future tokens with smarter utilization and even greater potential upside than either Bitcoin or Ripple.  In other words, the blockchain ecosystem in 2018 will be no different than the Web ecosystem as it existed in 1995.

Will Equifax be a boon for the security industry?

According to a statement issued on September 15, 2017, Equifax, noticed “suspicious activity on July 30, 2017” and “took offline the affected web application that day.”  The impacted web application was a web application supporting framework, Apache Struts, ultimately used to create java-based web applications.  After patching, Equifax brought the application back online.

Equifax claims it first became aware of the vulnerability sometime in May 2017.

By way of background, this vulnerability was widely disclosed on March 13, 2017.  At that time, both the United States Computer Readiness Team and NIST issued “high vulnerability” warnings.  More importantly, Apache actually released its open source Struts 2.5.10 General Availability release that fixed this vulnerability a month earlier on February 3, 2017.

All of this is significant given that many mid-sized and large enterprises run Open Source Software (OSS) products and unless they hire staff or retain an outside vendor specifically tasked with tracking security announcements of their deployed software products – including any OSS web-facing tools, these products will likely not be promptly patched and scenarios like what befell Equifax will continue.  In other words, what happened to Equifax can very easily happen again to any number of large enterprises.  There are ways to mitigate this risk that may likely prove a boon to the security industry.

In addition to relying on a battle-tested CIO, CISO, and IT team, there are numerous ways companies can mitigate against an Equifax sort of incident from knocking on their boardroom door.

For example,  companies can hire inside staff or an outside vendor who considers patch management not merely a compliance check off item; evaluate how OSS is deployed and confirm who has final responsibility for patching known vulnerabilities; deploy tools to scan source code on an application level; and most important of all – trade up security priorities from being compliance driven in favor of a proactive security risk management approach that takes into account the type and amount of sensitive data processed,  maintained, and transferred.  There are many other ways of mitigating an Equifax risk but the above approach tends to be the one that best follows a cost-effective 80/20 approach that also satisfies regulators.  Information security funds can also be wisely spent deploying a kill chain approach that  actually works given it deliberately considers the evolutionary nature of security threats.

And finally, be mindful that when going out to market for new technical vendors, firm size has little correlation to the beneficial capabilities of the vendor.   Some smaller security vendors have the capacity to deploy unique skills and tools unavailable to larger vendors – that has always been a little known secret of the security industry.  The most effective players in this industry prefer working in small packs so it is no surprise vendors employing them often lose them within the first year after getting gobbled up by a larger vendor.

Anthem proposed breach settlement can rise to $115 million

On June 23, 2017, class counsel in the Anthem Inc. data breach litigation filed papers claiming there has been agreement on a $115 million settlement regarding the 2015 data breach involving 80 million Anthem users.  The proposed settlement will provide Anthem’s health insurance customers  two additional years of credit protection and monitoring as well as full reimbursement for losses sustained.  In what is likely the largest data breach settlement to date, plaintiffs’ counsel will end up with a cool $38 million in attorneys’ fees.

In order to get these fees, counsel for plaintiff “filed four consolidated class action complaints; litigated two motions to dismiss and 14 discovery motions; reviewed 3.8 million pages of documents; deposed 18 percipient fact witnesses, 62 corporate designees, and six defense experts; produced reports from four experts and defended their depositions; produced 105 plaintiffs for depositions and produced 29 of those plaintiffs’ computers for forensic examinations; exchanged interrogatories, RFA, and expert reports with Defendants; and fully briefed class certification and related Daubert motions.”

Whether or not there were ever actual damages sustained by the Anthem class is almost beside the point given counsel for both plaintiffs and defendants were allowed to generate fees meriting a $115 million settlement.  Future counsel in massive data incidents will unfortunately view this settlement as a benchmark target. CISOs around the country now simply just have to avoid a massive data incident.

WannaCry provides a wakeup call for more training on email exploits

On May 12, 2017, WannaCry ransomware infections reportedly took hold of 200,000 computer systems in 150 countries.  The rise of ransomware has been a function of how cheap financial data has become to obtain on the dark web and the desire of criminals to branch out with other sources of income.

Ransomware is quite effective given it purposefully seeks to panic victims into clicking additional links thereby causing a user’s system to become infected with more pernicious malware.  For example, after seeing a screen blink on and off several times ransomware victims may next see the following message on their screen:  “Your computer has been infected with a virus. Click here to resolve the issue.”  Clicking on that link, however, will download additional malware to the system – thereby precluding possible quick fixes to the initial exploit.  It is such additional malware – coupled with very vulnerable legacy systems and procedures, that likely helped WannaCry promulgate so quickly.

Given slow patching and continued widespread use of legacy Windows products, Microsoft sought to slow the spread of WannaCry by offering free patches for its older Windows systems such as Windows XP.  Although helpful in curtailing replication, timely patching will not completely stem this threat.   Newer exploits such as WannaCry likely exist – and will continue to exist for some time, given the underlying code was reportedly created by the National Security Agency and is only a small sample of the “treasure trove” of spying tools released by WikiLeaks in March.  In fact, the WikiLeaks released material includes the source code used to evade anti-virus detection so entry-level hackers apparently now have the ability to immediately up their game.

Given that healthcare data is now considered the most valuable data by thieves, it is no surprise that the healthcare industry was especially hit hard by the WannaCry ransomware exploit.  Succumbing to WannaCry, Britain’s hospital network canceled or delayed treatments for thousands of patients.   In an effort to stem the tide in the US, HHS quickly offered covered entities access to loss prevention resources – including a link to its ransomware fact sheet and a link to the US-CERT response to WannaCry.  US-CERT offered last year helpful tips regarding ransomware loss mitigation techniques.

It is suggested that covered entities take to heart HHS’s desire to warn regarding ransomware exploits.  Given that OCR recently fined a covered entity $2.4 million simply for placing the name of a patient on a press release, ignoring HHS warnings regarding ransomware will likely result in significant penalties to HIPAA covered entities should they fall prey to such an exploit.

In addition to security procedures and implementations – such as whitelisting acceptable programs, aggresive email settings, and limiting user permissions, proper training remains the best antidote to both an exploit as well as an OCR or some other regulatory fine if an exploit ultimately succeeds.  And, the best training remains having users react to a continuous barrage of decoy exploits aimed at sharpening their skills.

Today’s phishing exploits that are being used to transmit ransomware often rely on some other person’s scraped contact information so that they can appear to come from known associates of the user.  These exploits may also use content that appear relevant to the user – such as a bar association communication.    And, finally the links themselves are masked so that it is not even possible to accurately determine where a link takes the user.   Given these indicia of authenticity, users often click on the embedded link rather than hit the delete button.  After exposure to numerous training exploits users are in a much better position to make sound decisions on how to treat actual exploits.  During the course of security training, it is suggested that some form of reward be given to those users who score the highest on the phishing training exercises – any money spent today to build an effective training program will pay significant dividends down the road.

ACC suggests $10 million in cyber coverage for outside legal counsel

On March 29, 2017, the Association of Corporate Counsel released a set of model cybersecurity practices to help corporate legal departments address security and risk management issues born out of their outside legal counsel’s use of sensitive company data.    Protecting corporate data has increasingly been a top-of-mind topic for in-house counsel.  As reported by Corporate Counsel magazine, from 2014 to 2017, the percentage of in-house lawyers viewing the threat of data loss as an “extremely” important issue rose from 19 percent to 26 percent.

This proposed set of best practices should really come as no surprise.  Law firms have already been targeted with ransomware exploits given a small payment to access encrypted data takes a far backseat to potential lost billable time .   Similarly, law firms have long been targeted by sophisticated criminals and state actors interested in the wealth of confidential data they maintain.

In is not clear, however, how most outside counsel will comply with several of the best practices outlined by the ACC given the significant expense, implementation risk, and time commitment.  For example, the ACC suggests the following three baseline measures:

Outside Counsel shall have vulnerability management and regular application, operating system and other infrastructure patching procedures and technologies reasonably designed to identify, assess, mitigate, and protect against new and existing security vulnerabilities and threats, including viruses, bots, and other malicious code.

Outside Counsel shall have, shall implement, and shall maintain network security controls, including the use of firewalls, layered DMZs and updated intrusion, intrusion detection and prevention systems, reasonably designed to protect systems from intrusion or limit the scope or success of any attack or attempt at unauthorized access to Company Confidential Information.

If Outside Counsel has not achieved ISO27001 certification, Company may request that Outside Counsel undertake the certification process and provide Company with evidence of certification when attained.

Although AV protection and patching is fairly standard fare, not many law firms will go to the trouble of getting ISO certified or developing an intrusion plan focused on thwarting or mitigating attacks that are based on the nature of the data involved.    In fact, the ACC has done what is fairly typical of published “best practices”, namely it put together a wish list that will never be implemented by the vast majority of outside counsel.

Found in these best practices, however, is one suggestion that may actually have some appeal for a wide range of law firms – a risk transfer model that puts the onus on an insurance carrier to foot the bill for a data incident.    Specifically, the ACC suggests law firms purchase at least $10 million in cyber insurance:

Without limiting its responsibilities set out in herein, in countries where cyber liability insurance coverage is available, Outside Counsel will obtain and maintain in force at all times cyber liability insurance with an insurance company having a minimum credit rating of A- from Standard and Poor’s or other equivalent rating agency, with a minimum coverage level of $10,000,000.

Although the cost to purchase $10 million in limits may be significant, it will open the door to some minimal underwriting for security best practices as well as the recognition that a deep pocket is always available to absorb the risk.    In other words, it will be a much softer route for outside counsel to obtain buy-in regarding its data security chops  if it starts with the purchase of data loss and privacy insurance.  After purchasing this insurance – and satisfying the encryption and other underwriting requirements, outside counsel’s next steps are largely dependent on the size of the firm.   Indeed, for a smaller firm, $10 million may not make any sense – a much smaller $5 million or even $2 million policy limit would be sufficient.  Even though some law firms rely on data loss and privacy insurance to address coverage gaps and transfer loss caused by a data intrusion it remains a non-standard coverage.

For a larger firm, there is also more likely an IT Director, CIO or even a CISO already in place.  Such positions necessarily bring with them certain advanced practices that can be found in the ACC’s suggested best practices.  On the other hand, in a law firm with no such position in place – nor the money or desire to create one, the Office Manager is often tasked with squeezing out the most security from the smallest possible budget.  In that instance, firewalls and proper endpoint protection are necessary baseline defenses.  Also, the use of certain cloud security vendors – including those providing encryption or phishing-detection email services, can end up being a cost-effective step up in security.   Applying the NIST Cybersecurity Framework or getting ISO certified is far fetched to say the least.

No matter what the size and level of sophistication law firms will always remain low-hanging fruit for dedicated thieves looking for some good data to steal.  To that end, the ACC’s grandiose best practices can only be perceived as a beneficial and necessary step in the right direction.

The rise of Ransomware

Given credit card data and account information is now dirt-cheap to buy on the dark web; it no longer makes much sense for criminals to exclusively target financial information – especially since the data must also be sold after it’s stolen. Much more lucrative – and quicker to obtain, are the bitcoins deposited by ransomware victims into a thief’s account.

Welcome to the hottest cyber-criminal activity of today – ransomware.  Although ransomware such as PGPCoder has been around for a decade, this exploit only gained wide traction during the past several years. Combining the best of social engineering, e.g., well-crafted spear phishing using publicly available information, including emails of licensed professionals, with botnets usually tasked with promulgating spam, criminals have been able to re-purpose the latest Trojans for a much more lucrative job.

The most recent crop of ransomware scams have successfully targeted professionals. The Florida Bar recently warned its members these phishing exploits can use various subject lines, including “Florida Bar Complaint – Attorney Consumer Assistance Program”.   A scam email with “Lawyers and judges may now communicate through the portal” in the subject line uses information found in a June 1, 2016 Florida bar article. Preying on many lawyers’ natural tendency to help, the email asks recipients to “test the portal and give feedback.”

Florida Scam Email

During the past several weeks, Florida lawyers clicking on the masked link found in the above email notice were surprised to learn their entire computer network was held for ransom – automatically encrypted in one fell swoop by criminals half way across the world. Users only become aware of this exploit when they can no longer access their data and see a message on their screen demanding a ransom payment in exchange for a decryption key. The message also includes instructions on how to pay the ransom, usually with a widely traded anonymous digital currency such as Bitcoin or anonymous pre-paid cash vouchers such as MoneyPak and Ukash.

In the same way the IRS would never cold call you about an audit, no bar association would ever deliver a complaint simply by email.   Nevertheless, these scams succeed with a good number of professionals who are pressed for time, have computers systems that do not automatically filter executable content or simply just don’t have adequate training. Indeed, even if there is adequate training and sophisticated IT personnel running a firm’s network, law firms are never immune to hacking incidents.   This past March, it was reported by The Wall Street Journal that two blue chip firms, Cravath Swaine & Moore LLP and Weil Gotshal & Manges LLP, were among a number of law firm hacking victims.  Law firms will always be vulnerable to a direct attack by a sophisticated hacker.  A panel of law enforcement specialists in 2015 put it best when they said law firms are seen as “soft, ripe targets for hackers.”

As reported by the Wisconsin Bar Association, the ABA’s Division for Bar Services has been monitoring a rise in ransomware exploits, with recent confirmations of scam emails also sent to lawyers in Alabama, Georgia, and California. The ABA has been working with the FBI to get the word out regarding ransomware – leading to state bars pushing out the message via newsletters and blog posts. In fact, the ABA has been warning lawyers for years regarding data security. Indeed, there is an argument that improved data security helps with the marketing of a law firm.

Although recent attacks have fed on a lawyer’s publicly accessible email address, these very same attacks also go after other professionals. For example, targets include hospitals – where patient information can ill afford to stay locked for a very long time.  As well, a growing number of accounting firms are falling prey to ransomware.   Ransomware is especially damaging to accounting firms given accountants hold critical financial data of clients that is often deadline-focused. Indeed, there may be significant penalties accessed against clients for untimely filings.

The threats have become more pronounced as criminals realize the benefit of redirecting resources to ransomware aimed at professionals such as lawyers and accountants. A consultant who assists accounting firms guard against ransomware attacks warned accountants last year of the polymorphic Virlock that spawns unique versions after every use so antivirus programs cannot recognize it as well as TeslaCrypt that uses file names associated with well-known online games found on a child’s computer – which can spread to other computers attached to a home network, including an office PC.

As set forth in a 2014 CERT notice, destructive and lucrative ransomware variants include: Xorist, CryptorBit, CryptoLocker, CryptoDefense, and Cryptowall. All of these exploits encrypt files on the local computer, shared network files, and removable media. Although the private decryption keys for CryptoLocker, Xorist, CryptoDefense have since become available – rendering these exploits defensible, recent ransomware variants with no available decryption keys continue to launch.  For example, in June 2015, the ABA warned about the CryptoWall ransomware exploit.  And, a March 9, 2016 blog post from the security firm TrustWave details a major botnet operator moving from spam campaigns to delivering a new ransomware exploit deploying malicious javascript – the Locky ransomware.   Kaspersky Labs also wrote about the Locky ransomware – and its successful targeting of several hospitals.   If it has not already done so, it is only a matter of time before the Locky ransomware migrates to lawyers and accountants.


FBI April 2016 Report

The FBI has addressed ransomware exploits for some time now – likely given it was inadvertently a participant in one such exploit. In 2012, the FBI was spoofed in a Reveton ransomware attack activated when a user visited a compromised website. Once infected, the victim’s computer immediately locks, and the monitor displays a screen stating there has been a violation of federal law. The bogus message goes on to say that the user’s Internet address was identified by the FBI as having been associated with child pornography sites or other illegal online activity. To unlock their machines, users are required to pay a fine using the MoneyPak prepaid money card service.

According to an April 29, 2016 FBI Bulletin, the FBI saw a pronounced increase in ransomware attacks in 2015 – with a projection that it will grow a great deal more during 2016. Despite the fact it will always be easy to pay ransom given the instructions are explicit and the amount sought can be in the $400 range, the FBI doesn’t support paying a ransom in response to a ransomware attack: “Paying a ransom doesn’t guarantee an organization that it will get its data back [and] not only emboldens current cyber criminals to target more organizations, it also offers an incentive for other criminals to get involved in this type of illegal activity. And finally, by paying a ransom, an organization might inadvertently be funding other illicit activity associated with criminals.”

Instead, the FBI suggests the key areas to focus on with ransomware are prevention, business continuity, and remediation. Given that ransomware techniques are rapidly evolving, business recovery and continuity become even more crucial. More to the point, as recognized by the FBI: “There’s no one method or tool that will completely protect you or your organization from a ransomware attack.”   Instead, the FBI suggests firms focus on a variety of prevention efforts – in terms of awareness training for employees and technical prevention controls, as well as the creation of a solid business continuity plan in the event of a ransomware attack.  Planning for disaster can never be considered wasted time. And, after a ransomware attack is suspected, victims should immediately contact the local FBI field office and report the incident to the Bureau’s Internet Crime Complaint Center.

If a firm has a proactive approach, there are certainly some basic things that can be done today to avoid a ransomware exploit. In an effort to help its constituency, the ABA has conveyed some basic technical defenses against ransomware:

  • Block executable files (such as “.exe” files) and compressed archives (such as zip files) containing executable files before they reach a user’s inbox.
  • Keep operating systems, browsers and browser plug-ins, such as Java and Silverlight, fully updated.
  • Program hard drives on your computer network to prevent any unidentified user from modifying files.
  • Regularly back up data with media not connected to the Internet.

As for the most basic of “basic training”, law firm administrators are being awakened to this threat with some sound advice that never gets old: “Be smart. Be aware. Don’t open or click on anything that looks suspicious. They won’t come in if you don’t open the door.” In other words, never click on a link, file or image from an untested source or untrusted URL. The extra seconds it takes to confirm the actual sender of an email message or owner of a website is well worth the time.

Given that business continuity best practices should mesh with IT security best practices, backups should obviously be stored outside the network. And, if you are forced to restore from a backup it is never wise to restore your data over existing production data. Consulting with a disaster recovery specialist before disaster strikes probably is a good idea.

Professionals – especially lawyers and accountants should also consider purchasing insurance that covers ransomware losses – including the related IT expenses.  Such insurance is typically purchased using a standalone policy that has been around for years. There are some malpractice insurers, however, e.g., CPAGold, who provide such coverage directly in the policy. Tech vendors and legal counsel associated with these carriers typically have years of experience handling these incidents and can be rapidly deployed to address any situation.

Given the serious threat of ransomware, businesses large and small are reminded to at least do the basics – train staff regarding email and social media policies, implement minimum IT security protocols, regularly backup data, plan for disaster, and regularly test your plans.

Wyndham Settles with FTC

Ending its epic battle with the FTC, Wyndham entered into a settlement agreement with the FTC.  Under the terms of the Stipulated Order that was filed on December 9, 2015 with Judge Salas, Wyndham will establish a “comprehensive information security program designed to protect cardholder data – including payment card numbers, names and expiration dates.”  In addition, the company is required to “conduct annual information security audits and maintain safeguards in connections to its franchisees’ servers.”

These safeguards have a shelf-life of 20 years — common for FTC stipulated agreements involving data breaches.  What is noteworthy and distinct from other settlements, however, is that there is no money changing hands — Wyndham pays no fines, investigative costs or any amount for that matter.   This overall result — especially in light of the Third Circuit ruling, can only be considered a solid victory for Wyndham.

Franchise operators also scored somewhat of a victory given the FTC finally gives some guidance as to what it considers to be a reasonable security program for franchise operators.  First, the FTC alerts future companies that if they conform to the most current Payment Card Industry Data Security Standard (PCI DSS) for certification of a company’s security program, they are in the right direction towards implementing a satisfactory program.  Indeed, the settlement specifically defines its terms as per PCI DSS Version 3.1.  Not surprisingly, the second aspect of a suitable program requires the implementation of a risk-based approach to threat assessment.  As set forth in I.C of the Stipulated Order, Wyndham’s program must include “the design and implementation of reasonable safeguards to control the risks identified through risk assessment (including any risks emanating from the Wyndham-branded Hotels), and regular testing or monitoring of the effectiveness of the safeguards’ key controls, systems, and procedure.”

The agreed-upon requirements also apply to any “entity that that Defendant has any ownership interest in or controls directly or indirectly that may affect compliance obligations arising under this Order.”  And overall compliance features of the Stipulated Order mimic discovery process available under the Federal Rules of Evidence and will certainly be tested over the twenty-year term.  Such future testing — coupled with potential new breaches, may lead to future stipulated Orders.  For the moment, however, Wyndham should be relieved with the results of its FTC skirmish — as well as happy with the work done by its counsel.

California Rakes in $25 Million from Comcast

On September 17, 2015, a California Judge approved a final stipulated judgment between media giant Comcast and the California Public Utilities Commission.  In Paragraph 17 of the Complaint filed the same day, Comcast was not exactly accused of heinous conduct:  “for varying periods of time between July 2010 to December 2012, and for many customers the entire period, approximately 75,000 Comcast residential subscribers in California who had paid Comcast the monthly fee for a non-published or non-listed phone number nevertheless had their subscriber listing information published on Ecolisting, and (in some cases) in phone books, and/or made available by a directory assistance provider.”

In other words, Comcast customers who paid to avoid potentially being listed on sites such a were inadvertently deprived of that purchased service.  Specifically, because “the ‘privacy flag’ was not attached to the listings of approximately 75 ,000 non-published/non-listed subscribers, Neustar provided those listings to Comcast’s vendor, Microsoft FAST, who then published them for Comcast on the Ecolisting website.”  Complaint at ¶ 15.

No financial data was exposed.  No transaction or business data was exposed.  No medical data was exposed.  No emails or passwords were compromised.  Indeed, the only information exposed was the very same information that could be obtained by anyone doing a few sophisticated Google searches – names, addresses, and phone numbers.   For most people, such information exists online independently of any Comcast action or inaction.   In other words, whether or not Comcast properly withheld such information would not likely prevent someone from finding it online.

As part of the settlement, Comcast must pay $25 million in penalties and investigative costs to the California Department of Justice and the California Public Utilities Commission.   The 75,000 customers who were “compromised” ended up with refunds and $100 more in restitution added to their Comcast bills.

And, as part of the stipulated judgment, Comcast also agreed to a permanent injunction that requires the company to strengthen the restrictions it places on its vendors’ use of personal information about customers.  The injunction also requires Comcast to provide a new disclosure form to all customers that explains the ways in which it uses unlisted phone numbers and other personal information.  Such restrictions and added duties have little to do with the actual transgression in question — they represent added gimmes obtained by the California AG’s office given the leverage it had over Comcast.

This case is yet another wake-up call to companies maintaining or processing large amounts of customer data.  Even though the Comcast settlement is somewhat unique given the nature of the information as well as the “unlisting service” provided, other companies also safeguard what may otherwise be publicly available information.  When there are assurances made that such information will be safeguarded, does that automatically elevate the value of the information?

The larger question is how can a transgression with no ostensible harm mushroom into a $25 million payment to a governmental agency?  Until a General Counsel can answer that question with definite certainty, the only course of action is to treat all customer data equally and ensure the requisite reasonable precautions undertaken to safeguard such information matches or exceeds what is considered state-of-the-art for that company’s industry sector.

Third Circuit Affirms Judge Salas in FTC v. Wyndham

In a 47-page ruling, the United States Court of Appeals for the Third Circuit affirmed today an April 7, 2014 ruling of Judge Esther Salas against Wyndham Worldwide.  In affirming the district court ruling, the Third Circuit left intact Judge Salas’s decision that the FTC has power to regulate “unfair trade practices” based on the alleged failed data security of Wyndham.

The Third Circuit recast Wyndham’s argument and ultimately rejected what was potentially viable on appeal as “[t]oo little and too late.”  As recognized by the Court:

Wyndham repeatedly argued there is no FTC interpretation of § 45(a) or (n) to which the federal courts must defer in this case, and, as a result, the courts must interpret the meaning of the statute as it applies to Wyndham’s conduct in the first instance. Thus, Wyndham cannot argue it was entitled to know with ascertainable certainty the cybersecurity standards by which the FTC expected it to conform. Instead, the company can only claim that it lacked fair notice of the meaning of the statute itself – a theory it did not meaningfully raise and that we strongly suspect would be unpersuasive under the facts of this case..

In what was a sua sponte rejection of Wyndham’s “implied” argument that it was not provided with sufficient statutory notice of the century-old Federal Trade Commission Act, the Court of Appeals recognized:

Moreover, Wyndham is entitled to a relatively low level of statutory notice for several reasons. Subsection 45(a) does not implicate any constitutional rights here. [citation omitted] It is a civil rather than criminal statute. [citation omitted] And statutes regulating economic activity receive a “less strict” test because their “subject matter is often more narrow, and because businesses, which face economic demands to plan behavior carefully, can be expected to consult relevant legislation in advance of action.” [citation omitted]

In other words, one of Wyndham’s arguments deemed potentially viable, i.e., that it should not be held to a standard never actually put forth by the FTC in any prior ruling, will likely be rejected on summary judgment.    According to the Court, the relevant standard “considers a number of relevant factors, including the probability and expected size of reasonably unavoidable harms to consumers given a certain level of cybersecurity and the costs to consumers that would arise from investment in stronger cybersecurity.”  It is this applicable standard that the Court found Wyndham should have been on notice of prior to the FTC Complaint being filed against it.

In a section of the opinion that may come back to haunt Wyndham – as well as future victims of a major data incident, the Court was quite blunt in its assessment as to whether this statutory standard was potentially satisfied.  Id. at 41 (“Wyndham’s as-applied challenge is even weaker given it was hacked not one or two, but three, times. At least after the second attack, it should have been painfully clear to Wyndham that a court could find its conduct failed the cost-benefit analysis. That said, we leave for another day whether Wyndham’s alleged cybersecurity practices do in fact fail, an issue the parties did not brief. We merely note that certainly after the second time Wyndham was hacked, it was on notice of the possibility that a court could find that its practices fail the cost-benefit analysis.”).

The import of this decision obviously reaches well beyond the Third Circuit.  As the only appellate court to affirm the FTC’s authority to enforce what it considers applicable cybersecurity standards — “standards” that no other governmental body uses as aggressively as the FTC, the FTC will have even greater leverage in future settlement agreements.  Given the scorched earth tactics taken during this litigation, it is possible the United States Supreme Court will be asked by Wyndham to weigh in.   There is certainly an argument to be made that Wyndham’s time and money would be better spent mending fences with the FTC.

UPDATE:   On the heels of this victory, the FTC announced on August 28, 2015 that it was going to hold a free “PrivacyCon” conference on January 14, 2016 at its Constitution Center offices.  According to the event description, PrivacyCon will “bring together a diverse group of stakeholders, including whitehat researchers, academics, industry representatives, consumer advocates, academics, and a range of government regulators, to discuss the latest research and trends related to consumer privacy and data security.”  Given that there is a call for “presentations seeking original research on new vulnerabilities and how they might be exploited to harm consumers” hopefully the attendee list to this free event does not have too many “John Smiths” listed.