China Leads the World in Hacked computers – Proving What?

According to a report by McAfee, in the last three months of 2009, about 1,095,000 computers in China and 1,057,000 computers in the United States were infected and made part of botnets used to send spam or attack Web sites.  Those numbers are in addition to the 10 million previously infected computers in each country. 

Stewart A. Baker, the former assistant secretary for policy at the Department of Homeland Security, points out the obvious in the Washington Post article describing the report when he says the number of botnet computers in a country says more about the vulnerability of the computers than about those who infected them.   Indeed, having so many hacked computers may indicate that China is not the source of as much malicious conduct attributed to it.   Baker points out:  “A nation that might want to use botnets as part of an attack probably would want to have its own computers bot-free and commandeer computers in other countries.”   Although it would be easy to cynically surmise that US interests are using Chinese computers while Chinese interests are simply commandeering US computers, we have a wide world of hackers that makes assigning blame much more complicated.

While the blame game plays out, China continues to deny any government role in hacking or network exploits and has purportedly cracked down on “hacking training sites” as per this recent article in China Daily.  According to the article, Black Hawk Safety Net was the largest hacker training site in China.  It openly recruited members,  disseminated hacker techniques, sold Trojan software and maintained online forums.  Those who ran the Black Hawk Safety Net were arrested under a new Chinese law that criminalized the offering of online attacking programs and software.   The article reports that Chinese Police used more than 50 officers to investigate the case.

Although it remains to be seen whether the widely publicized Google attacks  emanating from China were orchestrated by the Chinese Government, it does not really matter.  What is clear is that these sort of sophisticated attacks are not going away any time soon.  Whether attacks are caused by Chinese nationals, the Chinese Government or other foreign hackers,  companies need to put their combat boots on and throw away the old rules of engagement.  War is being waged against your business.  Protect your digital assets or risk everything.  It’s that simple.

Identity Fraud is at an All Time High – SMBs Beware

After interviewing 5,000 folks, the latest annual Javelin study claims that the number of identity fraud victims in the United States increased 12 percent to 11.1 million adults in 2009, while the total annual fraud amount increased by 12.5 percent (or $6 billion) to $54 billion.  

The report claims that small businesses are sustaining the most hits:  “They suffer identity fraud at one and a half times the rate of all other adults. By using their own personal accounts for business transactions, they are at a greater risk of exposing themselves to identity fraud.”  And, the report suggests that because small businesses are more at risk they “need to implement safety precautions online and offline, and should consider employee background screening checks as a precautionary measure.”

According to the report:

The economic downturn is partially to blame for the rise in identity theft, and identity thieves are increasingly using more sophisticated and varied methods to obtain the personally identifiable information (PII) of consumers. Fraudsters are becoming more sophisticated and more aggressive, and their organized approach to online fraud through a myriad of threats and scams makes it harder to detect.  Fraudsters are also increasingly targeting – and taking over – multiple accounts of their victims, collectively going after checking accounts, credit card accounts, mobile phone accounts, and Internet accounts in one full sweep.

Using a combination of sophisticated malware, keystroke logging, and phishing attacks, fraudsters are able to use organized crime to steal identities. And social networking has introduced yet another means for consumers to exposure their personal information to wider audiences, providing another avenue for fraudsters to conduct their scams.

When it comes to pointing out security threats and exposures, the report’s above descriptions do not really shine a light on anything new or startling.   What is helpful, however, is their pointing out just how widespread and pervasive these exposures are to small businesses – helpful commentary that cannot repeated often enough.

Twitter and the Benefits of NSAP Branding

Twitter disclosed yesterday that it had to reset some passwords due to an exploit that really could have hit any company.  In essence, certain visitors to a fake peer-to-peer search engine signed up for an account using the same username and password they used on their Twitter accounts.  The owners of the fake P2P search engine used this information to access the users’ Twitter accounts.  This exploit is not surprising given that a majority of online banking customers reuse their login credentials on other websites.  Accordingly, standing alone, this would have little impact on Twitter’s security standing.  Unfortunately, there have been more incidents.

On January 5, 2009, several dozen Twitter accounts were hacked, including one belonging to our president.  On May 21, 2009, Twitter’s name was used in a phishing exploit that sent users emails notifying them of new followers and included a link to a fake Twitter site.  There were also security incidents in April and June.  In fact, one analyst has gone so far as to claim Twitter’s security posture is weak enough to be called “security Swiss cheese.”

Why pick on Twitter?  Afterall, yesterday our Director of National Intelligence told members of the Senate’s Select Intelligence Committee that  malicious online activity is growing at an unprecedented rate.  As Dennis Blair put it, “in the dynamic of cyberspace, the technology balance right now favors malicious actors rather than legal actors, and is likely to continue that way for quite some time.”  

The reason to mention Twitter is because their new user growth has slowed down.  Big time.  According to a Hubspot Report, Twitter’s new user rate of growth has gone from 13% in March 2009 to 3.5% for October 2009 (the last month tracked).  

Although Twitter may have lost steam as a social networking tool simply because the novelty has worn thin, it is also likely the case that its public security failings have slowed growth.  It is very likely that the current stagnation in growth is even worse given that it is estimated about 25% of accounts have no followers and about 40% of accounts have never sent a single Tweet.  Why bother signing up for something you likely will not even use if you are skeptical of its security?   Simply put, there is no reason to take a chance on a new company if public security lapses make you feel insecure about your data.

All of this points to the need for better security; and more importantly, the use of a directed marketing message that highlights security best practices.  This strategy would not only serve to benefit social networking companies.  All companies holding personally identifiable information need to get their network security and privacy (NSAP) marketing message out to potential clients.  In other words, NSAP processes and procedures are not just tied to risk management and compliance, they directly relate to a marketing message that should lead to an increase in profitable new business.

Is Chinese Government Really to Blame?

Just wondering.  Is the Chinese Government being set up?  One has to wonder why a year-old report by a British spy agency was only recently leaked to the press.  Among other things, the report claims that free USB memory sticks loaded with trojan software was given to business leaders and lawyers at various Chinese trade events.  Another report  recently in the press indicates that classified documents from government and private organizations “including the computers of the Dalai Lama and Tibetan exiles” were hacked into.  Really?   The Dalai Lama?   Another report indicates that oil drilling data was purloined by servers in China.  

Given none of these attacks have any real direct linkage to the Chinese Government, the only two factors being used to implicate the Chinese Government relates to the sophistication of the attacks and the fact they originated on servers based in China.   This is hardly persuasive evidence that the government was involved.  There are any number of governments and large corporations able to perform these attacks.  Moreover, the fact that servers in China are being used also does not really indicate anything.  According to a report in Information Week, the country that hosted the most phishing sites in the third quarter of 2009 was not China.  It was not even close.  For example, in September 2009, the United States hosted 75.76 percent of all reported phishing sites.  China came in third place with 3.44 percent.  It is likely that of the US-based servers used, many were used by foreign attackers looking to cover their tracks. 

Similarly, it seems like a odd coincidence that oil data theft and so many other intellectual property hacking incidents are only being traced to Chinese servers when the Chinese Government – if culpable – could have easily used US-based servers to cover their tracks.  In other words, let’s not be so quick to blame the Chinese Government for attacks that could very easily have been done by other sophisticated hackers or simply Chinese citizens working on their own initiative.

Is the Bar Against Non-Lawyer Equity Owners Outdated?

Under Model Rule of Professional Conduct 5.4, “[a] lawyer or law firm shall not share legal fees with a nonlawyer” except under very limited circumstances.  Accordingly, it has long been the rule that only lawyers could manage or have an ownership interest in a law firm.   That is why, for example, no law firm (at least none in this country) has ever gone public.  Ostensibly, this rule prevents direct conflicts of interest in that shareholder interests are never allowed to trump client loyalty.  This rule mimics the rule that bars the corporate practice of medicine.  On the other hand, accounting firms generally only need a majority of their owners to be licensed CPAs.

If non-lawyers held an equity interest in a law firm, the Appearance of Impropriety Rulewould also apply whenever a law firm’s interests appeared to benefit equity owners’ interests over that of a client.  For example, a very conservative defense strategy might prolong a lawsuit and give the appearance that the strategy was enriching shareholders to the detriment of a client.  Aggressive collection strategies might also appear to create a direct conflict between shareholders and delinquent clients.  Although N.J. R. 1.7:210 is focused on barring dual representations, e.g., representing both sides in litigation, it can easily be envisioned that this rule might also apply to bar representations when outside shareholder interests were in direct conflict with a client. 

Are these ethical prohibitions fair or sound? 

Other than via the traditional “bill, manage, or produce” buckets, lawyers have few options when it comes to generating significant wealth.  For example, the potential upside for a successful litigation billed on an hourly basis is only the promise of future business.  Unlike their clients or even their investment banker peers, lawyers are not issued stock options, cannot invest in deals, and never reap the rewards of a seven figure annual bonus based on the upside of a corporate transaction.  This leads to an obvious disadvantage when it comes to law firms competing with hedge funds, investment banks, consulting firms, or high-growth companies.  It is clearly unfair that law firms experiencing double-digit growth are unable to reward those who contribute to such growth with some equity interest that can be sold to non-lawyers.  As for the soundness of such ethical prohibitions, they primarily make sense if one adopts a paternalistic approach – one that  assumes lawyers will not recognize the right ethical course of action unless given a blueprint.  Otherwise, the prohibition makes little sense.

In addition to questions regarding the soundness or fairness of this ethical framework, a bar against law firm shareholders puts US law firms at a disadvantage with global law firms who do have non-lawyer shareholders.  An article in the Wisconsin Law Review argues exactly that point:  “The very fact that outside equity is now available to lawyers in other jurisdictions, especially the United Kingdom, could create an influx of external competitive pressures on the American legal-services industry.”  It remains to be seen whether global competition from law firms who have non-lawyer equity owners will ever be sufficiently strong to warrant removal of the ethical bar.  More to the point, given the public’s general distrust of lawyers, it is doubtful these ethical barriers will be removed anytime soon.   The most we can hope for is improved creativity when it comes to billing and an increase in hybrid law firm practices.

SMBs Increase Investment in Data Security

More and more security firms are pushing their products towards the SMB market.  In a recent press release, Blackhat Solutions  looks to sell its services by warning “small to medium businesses of their financial and legal susceptibility in the face of increasingly sophisticated data hacking.”  This is no surprise given Forrester Research projects that about 40 percent of SMBs are planning to increase their IT security budgets for 2010.  In its $1,749 report, Forrester outlines why network security and data security top the IT investment and attention for SMBs.  The goal in increasing funding is to protect data rather than just finding broader operational savings – a past common driver of IT initiatives.

SMBs should also be looking to make a little lemonade with their added expenses.  Why not take this increase in data security expenditure and turn it into a profit-making marketing edge?  Most smaller firms who are able to position themselves as security stalwarts will eventually increase their market share no matter what industry they are in.  It’s that simple.   When building out their enhanced security capabilities, there is no reason SMBs cannot also get this marketing message out to their clients, business partners and employees.

Data Breach Expenses and BCBS of TN

According to a news report, BlueCross BlueShield of Tennessee admitted on January 25th that it has spent more than $7 million to address an October theft of 57 computer hard drives.   The company said that it may have to spend millions more to assess what was on the missing computer records and to provide identity protection for affected customers.   According to its website, the company has notified 220,000 BCBS customers in Tennessee and other states where persons covered by BCBS of TN plans may work.  Further, determining what was on the stolen hard drives as required by the HITECH Act and state notification requirements has required the hiring of more than 700 contract and BlueCross workers.

If we are to accept the Ponemon Institute’s most recent Cost of Breach report, this breach will ultimately cost BCBS of TN over $44 million.   Given that 67% of the $204 per record cost consists of lost customers and other indirect costs, it looks like BCBS of TN has another $7.8 million to go on its notification, credit monitoring, forensics and other direct expenses.

This breach is a stark reminder that even though the lawsuits are being won by breach defendants, costs incurred prior to the first lawsuit can be very significant.  Having a post-breach gameplan in place to address these costs has certainly become absolutely crucial during the past few years.   After all, nothing hurts a bottom line as quickly as a significant unfunded expense.

Update:  March 14, 2012
BCBS of TN agrees to pay HHS $1.5 million under the HITECH Act’s breach notification settlement.  When coupled with the $17 million in first-party expenses already paid, this incident remains a stark reminder as to the benefits of a network security and privacy insurance policy.

 

Google Attacks Provide a Valuable Lesson

The facts are starting to surface regarding the recent attacks against Google, Yahoo! and Microsoft – all of which have been linked to Chinese interests.  According to one recent report, the attackers selected employees with access to proprietary data, determined their social networking friends and then hacked into those accounts.  Once in control of the friends’ accounts, the attackers (posing as friends) sent their actual targets instant messages with links to sites that installed spying software on their computers.   

This sort of criminal strategy could be applied to any company – large or small.  In fact, it is much easier to assume that the president of a large middle market firm has more valuable intelligence on his computer than a strategic employee at a larger company.   Having knowledge of this sort of attack is important given the overall number of attacks against business has been increasing.  According to a recent CSO Survey, 37% of businesses polled have seen an increase in attacks during the past 12 months.  

One sure way to reduce the risk of a corporate attack is to limit social networking access to those individuals in marketing or sales who have a corporate reason to go to those sites.   Even those individuals should have proper training so that they would know, for example, not to click on links that have strange URLs or link to content that does not serve a distinct corporate purpose.  Also, try hard to avoid clicking on an image.  It may be hard to do.  Our propensity to click on whatever online content we see is a habit not easily kicked.

Ponemon Cost of Breach Report Released

According to the latest Ponemon COB report, data breach attacks have doubled this past year while the average cost of a data breach has increased to $204 per compromised record.  The Ponemon Institute looked at several variables when determining this $204 number, including:  lost business; legal fees; disclosure expenses; consulting help, including forensics; and remediation expenses such as improved technology and training.  Page 16 of the report indicates that lost business is the most significant component of this number – representing $135 of the $204 amount.   In other words, those firms disclosing to the Ponemon Institute information regarding their breach have had a signficant documented loss of business.  In addition to providing this valuable insight regarding brand damage caused by a breach, the report is also instructive given it offers information regarding the causes of 2009 breaches. 

According to this Ponemon Insitute report, data breaches generally have three primary causes:   third party negligence; malicious attacks such as coordinated botnet attacks; and negligent insider behavior.  In fact, the Ponemon Institute points out that 42 percent of all cases in the study involved third-party negligence.  Although this overall number (as well information in the report) is based on information provided by only 45 businesses  willing to speak in detail with the Ponemon Institute, the number should not be taken lightly – especially since it is not that far off from numerous other studies and surveys done over the years. 

The two lessons here – breaches lead to lost business and third-party negligence is a signficant cause of breaches – actually have more to do with marketing then with risk management.  In a prolonged down economy, small and middle market companies need to differentiate by showcasing their network security and privacy strengths.  Instead of shying away from the efforts needed to improve your network risk profile, embrace the endeavor by realizing it will only be a matter of time before you are required to do what you are voluntarily doing now.  As with most corporate best practices, being one step ahead of your competition when it comes to network security and privacy can turn into a significant marketing advantage.  Depending on your business goals and what you do to generate revenue, this advantage can easily turn into a sustained  competitive edge.

Is the Billable Hour Really Dead?

Law firms generally bill by charging an hourly rate for their “timekeeper” services.  Billing rates can slide up or down based on the litigation matter or transaction – for example, the pre-packaged rates provided to an insurer for defense work – or by the seniority of the timekeeper – with partners potentially charging hundreds more an hour than associates.  Even paralegals and some non-lawyer staff are charged at an hourly rate. 

There are obviously a few other factors tied to the standard billable hour system:  (1) How many hours are logged; (2) How many hours actually get billed to a client; (3) How many hours actually get paid by the client; and (4) How much in expense is paid by the client.  At its core, however, it’s the annual ritual of increasing billable hourly rates that has caused law firm double-digit growth for so many years.  Our economic troubles these past few years, however, have put a damper on that yearly ritual.

To that end, the press has generously covered any example of a law firm providing an alternative to the billable hour regime – with an eye towards claiming these sorts of arrangements are becoming more and more commonplace.  For example, it is reported that over 10% of Reed Smith’s new engagements involve some form of alternative fee structure while Saul Ewing offers clients flat fees in some insurance, due diligence and employment matters as well as with will preparation and patent filings. According to a March and April 2009 Altman Weil survey of Managing Partners and Chairs at 687 law firms with 50 or more lawyers, 27.9% felt that “more non-hourly billing” was a permanent change in their firm’s strategy. 

High profile lawyers such as Scott Turow have taken the “Kill the Billable” banner – even using his famous writing skills to pen an ABA Journal articleon the topic.  As Mr. Turow puts it, his “greatest concern is not merely that dollars times hours is bad for the lives of lawyers – even though it demonstrably is – but  that it’s worse for clients, bad for the attorney-client relationship, and bad for the image of our profession. Simply put, I have never been at ease with the ethical dilemmas that the dollars-times-hours regime poses, especially for litigators.”

Evan Chesler, head of Cravath, Swaine & Moore, has also very publicly called for the death of the billable hour.   According to Chesler, “[t]he system rewards inefficiency, frustrates clients and has little economic logic.”  Bill Lee, co-managing partner of Wilmer Cutler Pickering Hale and Dorr, offers his opinion in an article published by Corporate Counsel:  “For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of ‘productivity’ — defined as more lawyers and more hours per matter.” 

As the partner in a mid-sized or regional law firm, you are probably wondering why it matters what a Cravath partner has to say.   Just a bit more background.  According to a BTI Consulting survey of 1,700 corporate counsel there is a high correlation between how high a law firm scores on positive brand awareness and its revenues – not too surprising here to find law firms are not that different from other companies when it comes to branding.  In fact, the survey revealed that a “10 percent incremental increase in positive differentiation translates into a 28.5 percent increase in revenue for a typical law firm.”  What is meaningful is what we learn when we drill down a bit further. 

The survey reportedly uncovered that market differentiation was tied to a law firm’s innovation in technology, service and billing.  There is nothing too startling in listing “technology and service” given that most non-law firm businesses are measured by the same yardsticks.   What is important for purposes of this post is the fact that “billing” was considered by legal services buyers to be a marketing attribute that had a direct impact on differentiation and ultimately on a law firm’s revenues.  BTI suggested that “[m[aking aggressive use of alternative billing arrangements (sharing risk, being accountable, etc.)” would assist in such differentiation.  

When is the last time “billing” came up as a possible positive branding metric for a company you admired?  The fact that it came up in the BTI survey as a positive marketing attribute and is now being discussed by large law firm managing partners shows that there is marketing gold in being creative with your billing strategy – no matter what the size of your law firm. 

Law firms need to continually evaluate billing processes that may help to differentiate themselves from their peers.  For example, firms with  implemented billing guidelines will be consistent and more in tune to their clients’ needs.   Unfortunately, according to a survey from leading law firm billing expert, William Ross, 32.7% of polled law firms have little or no guidelines available to their lawyers.

Intellectual property and data breach counsel