Category Archives: IT Consultants

Ransomware Payments Should be Self-Insured

According to Chainalysis, payments to ransomware gangs using cryptocurrency more than quadrupled in 2020, with less than 200 cryptocurrency wallets receiving 80% of funds.  And, Palo Alto Networks – which claims to use data from ransomware investigations, data-leak sites, and the Dark Web, reports that the average ransom paid by companies in 2020 jumped 171% to more than $312,000.  Despite being around for many years, the rise of ransomware has largely coincided with the diminished value derived from compromised personal data.

The REvil ransomware-as-a-service operation now picks up the phone to add a threatening personal touch to its exploits:  “Calling gives a very good result. We call each target as well as their partners and journalists—the pressure increases significantly.”  According to a published March 16, 2021 interview with a representative of REvil – also known as Sodinokibi, the group has “big plans for 2021.”  

Probably the more interesting point made by this REvil representative was the answer to the following question:  “Do your operators target organizations that have cyber insurance?”  The answer is not much of a surprise:  “Yes, this is one of the tastiest morsels. Especially to hack the insurers first—to get their customer base and work in a targeted way from there. And after you go through the list, then hit the insurer themselves.”   This is the first confirmation from an actual ransomware gang that they target cyber insurance policyholders.

Articles from the Associated Press and ProPublica years earlier suggest that cyber insurers were inadvertently driving up ransomware attacks but neither outlet provided any hard facts to back up their supposition.  Indeed, a leading broker took the natural counterpoint:  “[A]lthough no one wants to support cyber criminals, organizations are forced to weigh the option of paying ransoms against the risk of operational disruptions that could last weeks or months and cost far more.”  

It was never hard to imagine, however, that buying cyber insurance actually places a target on those companies who buy it and do not likely have the security resources necessary to stop ransomware gangs – especially given carriers may be inadvertently providing a roadmap to their house.  Indeed, last year one major cyber insurer was purportedly targeted by the Maze ransomware gang.   And, as of March 2021, there were at least two ongoing investigations involving attacks on major cyber insurers. Unless things change, it will only get worse for insurers and brokers given they are the new holders of the crown jewels.

One tactic that can impede the current claims challenge facing the industry is building on what was recently begun by AIG – a thought leader in this space for over two decades.  In January 2021, AIG became the first lead cyber insurer to require ransomware co-insurance across the board – mandating that insureds share in paying a ransom payment.  Following this lead, the larger markets began hardening on price and their underwriting requirements.  Other markets immediately began to take advantage – only temporarily repairing the holes in the dike.   As pointed out by Inside P&C:  “The retrenchment of capacity and continued upward pricing pressure also continues a reordering of the market in which some of the largest names in US cyber insurance cede market share to upstart InsurTechs.”  

Despite the fact cyber insurer MGAs are heavily funded and are now grabbing as much market share as they can, they still use paper backed by the largest reinsurers in the world – who frankly probably care more about their own profits rather than the market growth strategies of unrelated companies.  In other words, any retrenchment may also eventually hit the MGAs when treaties get renegotiated.   

Retrenchment is a good idea but will not be enough to fully address the problem. The best way to solve this problem is to do exactly what the FBI has said for years – do not pay the ransom.  An October 2020 OFAC Advisory buttresses this “do not pay” advice by warning insurers against making ransomware payments to those on the OFAC list. In other words, law enforcement would prefer that ransomware payments not be made and it may ultimately be in everyone’s best interest if such payments are self-insured – making it much less likely they will actually be paid.

This is not K&R coverage where lives are typically at stake.  Once the ransomware gangs recalibrate knowing there is no available insurance payment, the incidents will resemble earlier times, namely demands that are less frequent and for lower amounts.  These threat actors want to go in and out as fast as possible given they know that the data itself likely has very little real value on the Dark Web – it’s the urgent threat of release that has exploitive value.  If there is no expeditious insurance payment, the actual value of the target diminishes.

Insurance dollars are actually better spent helping insureds bolster their security rather than the coffers of criminals – especially because even with a payment there is no guarantee that data would be properly decrypted or that a Dark Web release or sale would not take place. There is much that can be done to assist insureds improve their risk profile and better avoid ransomware exploits. Some very basic steps include developing trusted partner relationships with vendors and law enforcement before an incident takes place; retaining a security expert to evaluate the current readiness profile; providing consistent education and training of staff; and developing or updating a Business Continuity Plan.  

On a more technical level, full and incremental backups should be consistently performed like your company’s life depended on it; weak passwords of service accounts should be removed; system logs should be maintained and monitored; employee access to sensitive data and information limited; operating systems and applications timely patched; users with admin privileges evaluated to ensure passwords are strong and secure; system safeguards such as Windows Defender Credential Guard deployed; port connections monitored and unnecessary ones removed, etc., etc., etc.  The relevant protocols all have a common goal – harden security sufficiently so that the bear decides to run after the slower runner.  If everyone ends up becoming a fast runner, the hungry bear will eventually tire of the chase and just eat something else for food.

With a robust cyber insurance policy in place, most every resource necessary to assist a ransomware victim is already available to an insured. By focusing on these other valuable first-party coverages, improving an insured’s risk management profile, and curtailing ever increasing payouts to criminals, the industry will continue with its meteoric rise.

Cyber Insurance

UPDATE: March 25, 2021

On March 24, 2021, CNA publicly disclosed that it sustained a cybersecurity attack. As of March 25, 2021, the following is the only information found on its website:

UPDATE: May 10, 2021

The day before the Colonial Pipeline ransomware attack went public, global insurer AXA announced it would cease writing cyber-insurance policies in France that reimburse policyholders for ransomware extortion payments. This is hopefully the start of a much larger trend.

UPDATE: May 12, 2021

On May 12, 2021, security experts labeled as “absolute stupidity” comments regarding the payment of ransomware that were emanating from the White House. A few days prior, the White House’s Deputy National Security Adviser for Cyber, Anne Neuberger, had given the private sector a complete free pass regarding the payment of ransoms: “And they have to just balance off, in the cost-benefit, when they have no choice with regard to paying a ransom.” Unfortunately, this position directly contradicts the long-standing position of the FBI and numerous other government agencies.

Alleged cover-up leads to criminal complaint against former Uber CSO

In filing its August 20, 2020 criminal complaint against the former Uber CSO, the US Attorney for the Northern District of California issued a wake-up call to every CISO responding to a federal investigation of a data incident.  And, by stating in its press release, “we hope companies stand up and take notice”, the Justice Department has definitely thrown down a gauntlet against CISOs across the country.  

By way of background, Uber sustained a data breach in September of 2014 that was investigated by the FTC in 2016.  Uber designated its CSO – Joseph Sullivan, to provide testimony regarding the incident.  Within ten days of providing testimony to the FTC, Sullivan received word Uber was breached again but rather than update his testimony before the FTC he allegedly tried very hard to conceal the incident from the FTC.  Indeed, Sullivan allegedly went so far as to concoct a bug bounty program cover story and asked the hackers to sign an NDA as a condition of their getting $100,000 in bitcoin.

The Special Agent’s supporting affidavit swears that “there is probable cause to believe that the defendant engaged in a cover-up intended to obstruct the lawful functions and official proceedings of the Federal Trade Commission. . . . It is my belief that SULLIVAN further intended to spare Uber and SULLIVAN negative publicity and loss of users and drivers that would have stemmed from disclosure of the hack and data breach.”

In other words, a CSO allegedly spared his employer “negative publicity and loss of users” by inaccurately describing an incident and failing to disclose it in timely manner.  Even though the alleged conduct of Uber’s former CSO may have pushed the needle into the red zone, there are also potential arguments in his favor.  In coming up with one such counterargument, several Forrester analysts suggest:  “Sullivan did not inform the FTC during the sworn investigative hearing because he couldn’t have:  Sullivan learned of the 2016 breach 10 days later. To inform the FTC, Sullivan would have needed to reach out and inform them about a separate, new, but similar breach. There’s also some confusion as to whether Sullivan was under any legal obligation to do so.”

Whatever happens in this particular case, the fact remains CISOs sometime inadvertently play too close to the edge.  The underpinnings of an incident are whatever they are – no one can or should ever try to morph them into something different.  Good legal and IT counsel will mitigate loss and certain exposures but only with the assistance of CISOs and CSOs who recount events rather than fabricate them.  Not surprisingly given no company is immune to a breach, it’s only the cover-up that will ever hurt and not the incident itself. 

Ransomware Has Officially Become a D&O Problem

On April 30, 2020, ZDNet reported that there have been more than 1,000 SEC filings over the past 12 months listing ransomware as a risk factor – with more than 700 in 2020 alone.  These filings include annual reports (10K and 20F), quarterly reports (10Q), and registration forms (S1). 

Even the most sophisticated technology companies now insert the word “ransomware” into their Risk Factors section. See Alphabet, Inc., Form 10-Q, dated April 28, 2020, at 50  (“The availability of our products and services and fulfillment of our customer contracts depend on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage, interference, or interruption from terrorist attacks, natural disasters or pandemics (including COVID-19), the effects of climate change (such as sea level rise, drought, flooding, wildfires, and increased storm severity), power loss, telecommunications failures, computer viruses, ransomware attacks, computer denial of service attacks, phishing schemes, or other attempts to harm or access our systems.”).   

As reported by ZDNet, companies as varied as American Airlines, McDonald’s, Tupperware, and Pluralsight also list ransomware as a potential risk to their business. 

By inserting the word “ransomware” into a Risk Factors section, reporting companies may have elevated the relevant standard for companies who do not reference ransomware.  By way of background, in October 2011, the SEC began planting cyber risk disclosure seeds when it issued non-binding disclosure guidance regarding cybersecurity risks and incidents.  Back in 2011, the SEC wrote:  “Although no existing disclosure requirement explicitly refers to cybersecurity risks and cyber incidents, a number of disclosure requirements may impose an obligation on registrants to disclose such risks and incidents.” Seven years later, this non-binding guidance became binding.

On February 26, 2018, the SEC issued binding guidance that recognizes:  “Companies face an evolving landscape of cybersecurity threats in which hackers use a complex array of means to perpetrate cyber-attacks, including the use of stolen access credentials, malware, ransomware, phishing, structured query language injection attacks, and distributed denial-of-service attacks, among other means.”   By expressly listing ransomware two years ago in its Statement, the SEC was making it quite clear that the current threat landscape includes the risk of ransomware and that directors and officers have to address this likely risk.

More to the point, the Statement and Guidance on Public Company Cybersecurity Disclosures instructs “that the development of effective disclosure controls and procedures is best achieved when a company’s directors, officers, and other persons responsible for developing and overseeing such controls and procedures are informed about the cybersecurity risks and incidents that the company has faced or is likely to face.” 

Not surprisingly, the failure to disclose a prior ransomware attack would also be actionable.  See SEC Statement at 14 (“In meeting their disclosure obligations, companies may need to disclose previous or ongoing cybersecurity incidents or other past events in order to place discussions of these risks in the appropriate context.  For example, if a company previously experienced a material cybersecurity incident involving denial-of-service, it likely would not be sufficient for the company to disclose that there is a risk that a denial-of-service incident may occur.”).

If ransomware incidents were avoided altogether, however, there would be no liability attached to associated filings no matter what was communicated to the market. Moreover, even when attacks were not avoided, little disclosure risk would exist if the company applied best practices to avoid such an incident and provided an accurate accounting of what took place when an incident did take place. To that end, deploying proactive approaches considered state-of-the-art when dealing with ransomware risk will naturally mitigate against any potential SEC disclosure risk.

For example, there is at least one novel solution that can reduce ransomware attacks by anticipating when a compromised system’s ransomware package will be released and then neutralizing the ransomware threat before any ransomware release actually takes place.  By evaluating and deploying such cutting-edge solutions, companies will be well positioned to neutralize any potential shareholder claims – as well as satisfying the much more important task of protecting corporate data and other digital assets.  Thankfully, “it is never too late to begin importing a more robust security and privacy profile into an organization – which is the only real way to diminish the risk of a ransomware attack.”  As with most successful corporate endeavors, management buy-in will typically be the necessary first step.

New York’s DFS provides a two-month reprieve

On December 28, 2016 – after a very public outcry from the financial community it regulates, New York’s Department of Financial Services (“DFS”) pushed to March 1, 2017 the January 1, 2017 deadline to comply with its proposed data security standards.  These security standards and related regulatory requirements – which are unique in the country, were first disclosed by DFS this past September and include a data breach reporting deadline that is a mere three days in length.

After reviewing 150 comments, the DFS doubled down on its proposed standards and only gave two more months for compliance.  As it now stands, the regulation will be officially implemented on March 1, 2017 and impacted firms will have 180 days to begin compliance – September 1, 2017.  And, by February 15, 2018, firms will be required to submit a certificate of compliance to DFS.

Despite vigorous opposition found in the submitted comments, the DFS retained several important aspects of its proposed regulations, including the three-day window to report a “cybersecurity event” – broadly defined to also include unsuccessful attempts, and the need to file annual certifications of compliance.

Another key component of these proposed regulations requires the designation of a Chief Information Security Officer.  Even though most large financial institutions already have that position filled, many firms subject to DFS jurisdiction will now have to allocate resources to either hire such an employee or reassign an existing employee to take on these new challenges.

All in all, the new DFS regulations – implementing specific security standards on New York’s largest business sector, will immediately generate significant business for those tech vendors and privacy lawyers offering gap-filling solutions that actually work.

A Data Security Trend For 2011: The Data Threat Hype Continues

The new year appears to be continuing a trend begun in 2008 — ever increasing hype concerning the level of data security threats faced by public and private entities.  This hype is not just about increasing public breach disclosures (which have primarily been driven by the increase in breach notification laws) given it also manifests in:   the perceived threat of involuntary corporate transparency brought into public view by the “Wikileaks Effect”, the fact that papers such as the LA Times are able to report as true the powerful Stuxnet worm was able to trim years off of the Iranian nuclear program, and the fact that the Organisation for Economic Co-operation and Development (OECD), in a recent report, paints a picture of a world where “[p]reventative and detective security technologies will not provide protection against all the threats [so] considerable effort will be needed to mitigate and recover from losses.”  OECD Report (dated 14 January 2011) at 82.

For example, in the LA Times article, the Stuxnet worm was removed from its unique Iranian context and given broad scare appeal:  “Now that Stuxnet is in the public domain, experts are deeply concerned that hackers, criminals or terrorist groups could use some of the vulnerabilities it reveals to attack systems that control power grids, chemical plants and air traffic control.”

Third-party threats have indeed shifted but that shift took place over five years ago – when organized crime realized that stealing data could be more lucrative — and much safer — than traditional criminal activity.  The ego-driven hackers of yesterday may still exist in the form of the hackavists of today but they remain a minor threat compared to the threats driven by organized crime.  But that is not something new.

On the other hand, the hype that has filled the data security landscape has only risen to a fever pitch these past several years.  Not exactly sure why this is happening.  It may be the fact that more big business has entered the data security consulting/technology space – well equipped with PR firms in tow.  It may be because news organizations have found a new bogeyman that can help drive sales.  It may just be the case reporters and pundits truly feel the hype is justified.

No matter what the cause, one thing is for certain.  This hype does not help companies or governments better protect themselves.  Employees faced with this barrage of hype may be just a bit more lax — thinking there is little they can really do to prevent a theft.  This would be a grave mistake given that a significant source of data loss incidents is directly tied to employee negligence.   As well, if hype causes a CFO to think that state-sponsored incidents such as Stuxnet may be an imminent threat, he or she may suggest diverting resources from more important initiatives like employee training.

There are obviously ongoing data security threats faced by companies that are very real and not going away any time soon.  Marching into 2011, focused companies will weed the hype and address these many challenges utilizing a cost-effective risk management approach.   And, should they need legal or consultative advice, they will choose seasoned partners with the lowest volume setting.  Smart companies realize that succumbing to the hype is a zero-sum endeavor that will only benefit those who feed off the hype.

New York Metropolitan Area Tops Tech Jobs Ranking

According to a recently released report, the New York metropolitan area — including several nearby New Jersey counties — has more technology workers than any other in the United States.  The New York metro area had 317,000 technology jobs in 2009, topping a list of 60 other metropolitan areas, according to the Cybercities 2010: The Definitive Analysis of the High-Tech Industry in the Nation’s Top 60 Cities survey.   These New York metro jobs paid on average $98,500 annually and are mainly in computer systems design and related services.  

Although the New York metro area traditionally is known for being dominant in the financial sector, this report demonstrates something those in the tech/telecom industry have known for years.  Whether born out of Bell Labs in Murray Hill, New Jersey or IBM in Armonk, the New York metro area has laid claim to some of the major technology innovations of our time.  Couple those breakthroughs in core technologies with the new media leaps taken in Silicon Alley during the early days of the Internet and New York’s recipe for tech growth is quickly realized — it is all about innovation.  Those who innovate usually lead.

Tech Vendors Need Strong Hybrid Mix of Legal and Risk Management Counsel to Avoid Fraud Lawsuits

A growing list of technolgy vendor settlements should be a wake up call to tech vendors both large and small.   For example, last month, HP resolved a legacy EDP lawsuit to the tune of $460 million.  The facts of the case are not very complicated.  A decade ago, British firm BSkyB retained EDS to provide a CRM system for BSkyB’s help centers.  Two years later the contract was terminated and BSkyB completed the job using its own IT staff.  It also filed an action against EDS for misrepresention regarding its capabilities.  Although the initial contract included a liability clause that capped damages, the clause was ultimately rendered invalid due to fraud.

This past May, SAP and Waste Management announced the settlement of a lawsuit involving a failed ERM implementation.   Waste Management sued SAP for fraud in March 2008 over an allegedly failed waste and recycling revenue management system.   Waste Management allegedly sustained direct damages of over $100 million.   SAP responded in its original Answer that Waste Management didn’t “timely and accurately define its business requirements” nor provide “sufficient, knowledgeable, decision-empowered users and managers” to work on the project.  Much of Waste Management’s allegations turned on representations made by salespersons who were allegedly only concerned about licensing software that would create larger year-end bonuses.   According to its revised complaint, if a newer version had been used, “the multi-million dollar sales price for the software could not be immediately recognized as revenue under the accounting rules for revenue recognition,” and those salespeople involved in the deal would not receive bonuses.  According to its quarterly earnings filing regarding the reported settlement, Waste Management received “a one-time cash payment” in accordance with the settlement. The terms of the settlement were not disclosed.     

The price of a tech suit goes down steeply after fraud charges are dismissed.  For example, a lawsuit brought by a county government went from $10 million in alleged damages to an eventual settlement of $575,000 given there were only breach of contract claims remaining  after the fraud claims were earlier dismissed from the action.   Another action brought by yet another county government may not go as well for the tech vendor (Deloitte Consulting) given the fraud claims remain front and center throughout the complaint filed on May 28, 2010.

Claims are not only brought against tech vendors for millions of dollars.  Last year, Epicor was sued after a client spent $244,656.42 on an ERP implementation.  Again, the complaint sounded in contract breach but had negligent representation as well as fraud claims.  Here’s a list of similar suits

Moreover, tech vendors can include those who sell products such as iPhones rather than license software.   Earlier this month, Apple was hit with numerous suits seeking damages arising from the fact the latest iPhone has significant reception issues depending on how the phone is held.  Specifically, one suit accuses Apple of “general negligence, breach of warranty, deceptive trade practices, intentional misrepresentation, negligent misrepresentation, and fraud by concealment.”

For over twenty-five years, courts have allowed fraud claims to mingle with the negligence and breach of contract claims typically brought against technology vendors.  It is so much easier to prove (as was done in the EDP suit) that someone lied when contracting as opposed to showing how a contracted for systems implementation was not technically performing as promised.  Moreover, if fraud is proven, it will not only vitiate the limitation of liability and exclusion of consequential damages found in nearly all tech agreements, punitive damages may also become available.  In other words, a fraud claim is the magic bullet used by most plaintiffs to go around iron-clad contracts and the bar against awarding punitive damages in a contract dispute.

To best combat fraud claims, there are certain things that a tech vendor should do before, during and after a contract is negotiated.  For counsel on that front and for access to related risk management and contracting tools, please reach out.

New MA Data Protection Law Impacts Companies Around the Country

As of March 1, 2010, any company, organization, association or entity that has any sensitive personal information of a Massachusetts resident must now comply with a new law – Standards for the Protection of Personal Information of Residents of the Commonwealth (201 CMR 17.00).  This new law impacts an entity even if it is not located in or even does business in Massachusetts – all that is necessary to trigger a compliance obligation is that the firm maintains personal information on Massachusetts residents, including information on any customers and employees.  

Taking a page from the FTC’s Red Flags regulations, the new law requires that companies implement a written security plan to protect protected personal information.  An employee needs to oversee this security program, it must be regularly monitored, and the efficiency of the program needs to be reviewed at least annually or at any time when there’s a major change in a company’s business practices. 

Going further than the FTC and not wanting to disappoint given its name, Massachusetts has actually set forth specific data security standards in its new law.  For example, all records containing personal data that are transmitted wirelessly or sent via public networks need to be encrypted.  As well, sensitive personal data stored on laptops and other portable devices also must be encrypted. Companies will need to restrict access to records and files that contain personal information to only those employees who need such information to do their jobs.

Third party vendors who contract with businesses after March 1, 2010 are subject to the new law and also need to comply.  Those companies who contracted prior to March 1, 2010 are given two additional years to comply.  It remains to be seen whether other states will follow suit with Massachusetts but given the reach of the statute, it may not even matter.   Between the FTC and MA, good common sense may dictate that your firm implement a written ID theft prevention program sooner rather than later.

FTC Points Out P2P Risk

In a February 22, 2010 press release, the Federal Trade Commission states that it notified “almost 100 organizations that personal information, including sensitive data about customers and/or employees, has been shared from the organizations’ computer networks and is available on peer-to-peer (P2P) file-sharing networks to any users of those networks, who could use it to commit identity theft or fraud.” 

The agency also released new educational materials that recommend ways to manage P2P risk.  Interestingly, the FTC does not suggest that all P2P file sharing software be banned from a business.  The recommendation is to evaluate what sensitive data is being used compared with the benefits of using such software.  This recommendation fails to appreciate the fact that all P2P software used for a business purpose can likely be replaced with secure search software that does not require opening up your folders to strangers.  Moreover, there is no general business purpose for using LimeWire or similar software given such tools are focused primarily on locating free music and video files.   In fact, that is why some universities have banned the use of P2P file sharing software for years now.  The reasonable assumption is that if music and video does not fit within a scholastic environment, it does not in a business environment.

Several years ago, Information Week did an excellent expose of the P2P risk faced by many businesses.  This was a wake up call that was obviously not heeded given the FTC release.  In a similar vein, security specialists were warning years ago that there were hundreds of thousands of websites infected with SQL injection exploits.  To this day, SQL injection exploits remain one of the most popular tools for hackers to gain database access.   Unfortunately, given the “fix” for such an exploit requires some basic coding, it is beyond the expertise or concern of most businesses and individuals.

OCR Website Posts List of Breaches As Required Under HITECH Act

On February 22, 2010, as required by section 13402(e)(4) of the HITECH Act, the Office of Civil Rights (OCR) website posted a list of the covered entities that have reported breaches of unsecured protected health information affecting more than 500 individuals.  By posting this information on the OCR website, OCR has met its HITECH Act obligation, which required Health and Human Services (HHS) make this information public by posting it on an HHS website.    The 36 impacted organizations are located around the country and run the gamut from the very small to one of the largest health plans in the country.

Although the majority of the breaches posted involved lost media and laptops, there were instances involving paper records, including several instances of mailings that included protected information.    As well, there were a number of instances of hacking with a few involving compromises of business associates. 

It remains to be seen whether this public display will shame companies into not losing laptops or being the victim of a theft.  What is clear, however, is that having your name listed on a public site will open you up to more potential litigation expense.