Category Archives: Risk Management

Defi Security Growing Pains Continue with BitMart Breach

On December 6, 2021, crypto exchange BitMart – which bills itself as “The Most Trusted Crypto Trading Platform”, announced a security breach “mainly caused by a stolen private key that had two of our hot wallets compromised.”   A tweet from security analysis firm PeckShield first called attention to this hack days earlier.  According to Peckshield, the loss is around $196 million.  Interestingly, BitMart at first denied there was any hack – claiming it was “fake news”.

According to the BitMart Twitter release:  “At this moment we are temporarily suspending withdrawals until further notice.”  A Telegram “ask me anything” is scheduled for 8:00 p.m. est this evening.

Similar to what was done by other centralized crypto exchanges after a security incident, BitMart will use its own funds to compensate users impacted by the theft.   

The BitMart theft comes on the heels of a report by London-based consulting firm Elliptic revealing billions of dollars stolen from DeFi platforms.  According to Elliptic’s recently released report, the overall losses caused by DeFi exploits total $12 billion and of that amount, fraud and theft accounted for $10.5 billion, seven times the amount from last year.

Thefts hitting crypto exchanges such as BitMart and DeFi protocols such as Poly Network shine a light on the fact DeFi is largely driven by startups lacking cybersecurity maturity.   In contrast, the financial institutions that literally spend billions on cybersecurity want no part in helping DeFi projects; and more likely, welcome cyber incidents that tarnish DeFi’s reputation.  Until they reach a higher level of security and such incidents become less commonplace, DeFi projects will continue making platform users whole after a security incident – or risk a total collapse in the market for non-money laundering usage. 

Depending on their popularity, open-source products can be highly secure and DeFi should be no different. At some point in time – after decentralized protocols are adequately security tested and implemented and DeFi projects become fully independent and organic and not reliant on any centralized cloud solution or centralized servers, breaches such as the one that hit BitMart will be rare.  In other words, as the market and business opportunities for DeFi increase in scale and scope DeFi’s security profile will naturally evolve.

DeFi May Overtake Traditional Finance If Crypto Changes to 26 U.S.C. § 6050I Becomes Law

The day after the world’s largest NFT event concluded – a truly spectacular event, a bill criminalizing unreported digital asset transactions over $10,000 was sent for presidential signature.  Prior to passage, one blogger warned:  “The amendment to section 6050I is an affront to the rule of law and to the norms of democratic lawmaking. It was slipped quietly into a 2,700 page spending bill, allegedly as a tax measure to defray the bill’s trillion-dollar price tag even though section 6050I is in fact a costly criminal enforcement provision.”

While US bankers and financial institutions thought this provision would level the playing field or even knock DeFi out from the playing field, it may eventually have the exact opposite impact.  By way of background, the 1980’s era 26 U.S.C. § 6050I requires persons who engage in “a trade or business” and receive “more than $10,000 in cash in 1 transaction (or 2 or more related transactions)” to file a Form 8300 report containing the “name, address, and TIN of the person from whom the cash was received, the amount of cash received, [and] the date and nature of the transaction”. 

In the proposed amendment to this law, however, there is a new additional definition of “cash”, namely “any digital asset (as defined in section 6045(g)(3)(D))”.  The definition of “digital asset” is broadly defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”.  Not surprisingly, existing exemptions for “cash received by financial institutions” and reporting organizations or for those transactions “occurring outside the United States” all remain intact.

If this law is signed “as is” – which is apparently likely, it will push a knife deep into the virtual heart of DeFi, NFTs and any other burgeoning alternative investment solutions targeting US customers.  The KYC and reporting requirements would presumably create insurmountable disadvantages.

Some bitcoin whales rejoiced given that hodlers don’t really care much about DeFi or NFTs – they just want to buy more bitcoin and anything that gives rise to anti-governmental sentiment is bullish for hodlers.  In fact, BTC rose to new heights on the news.

While in the short term DeFi and NFT platforms may have significant new hurdles if this bill is signed into law, in the long term it may have the opposite impact intended by the bankers who likely pushed for this financial reporting provision in an “Infrastructure Bill”. 

For one thing, no one country can kill something that is truly decentralized – whether it is China, India or the United States.  The whole point of decentralization is that it is not tethered to any country.  Mandating governmental centralized reporting is no different than pushing a child into a pool – the reality quickly becomes “sink or swim”.  If this bill gets signed, platforms may very well expedite their decentralization plans and US banks will be flanked by truly decentralized platforms they cannot control or influence and participants who would rather take more control over their financial future.  After a decade or two, traditional financial institutions may very well go the way of Sears.

UPDATE: November 16, 2021

On November 15, 2021, the Infrastructure Bill was signed into law. None of the major news outlets discussed the change to 26 U.S.C. § 6050I – with only a few discussing the changes impacting digital asset broker disclosures. One senator, however, introduced on November 16, 2021 a bill to repeal all of the Section 80603 digital asset provisions – including that one involving 6050I. With any luck, it will quickly be enacted into law. And, if not, there is still the potential that down the road this change will forever alter the financial institution landscape by accelerating implementation of DeFi.

$600 Million Loss Shines a Light on DeFi Security

On August 10, 2021, Chinese cross-chain DeFi platform, Poly Network, was apparently hit with the exploit of a smart contract vulnerability in its “EthCrossChainManager” contract impacting three separate chains, including two leading DeFi blockchains – Ethereum and Binance Smart Chain, and numerous cryptocurrencies.   This latest exploit is part of a major trend in security incidents involving DeFi platforms.

Poly Network developers quickly asked for help on Telegram to block transfer of the stolen assets:   “We call on miners of affected blockchain and crypto exchanges to blacklist tokens coming from the above addresses.”  

In another August 10, 2021 post on Telegram, Poly Network also posted:  “If you are experiencing any difficulty due to the hack that just happened theres [sic] a compensation plan , connect your wallet and get your refund in minutes , our dev only lose but this did not affect any of our users.”  

It is not clear how this protocol platform would make all users whole.  

As a start, the ESL Poly Network team also posted the following open letter asking for the return of the stolen assets:

Not surprisingly, this plea was immediately derided:  “Imagine successfully stealing over $600m and have the people you stole from think there’s a chance you might be willing to return it with what amounts to a passive-aggressive post-it note on the fridge.”  

Notwithstanding the obvious desperation found in its letter, the Poly Network team may be on to something given this was apparently never really a “hack” – it was likely yet another person who exploited a vulnerability in a deployed smart contract.  As of August 11, 2021, $119 million in Binance pegged BUSD was returned by the hacker’s associated address to those 947,598 owners impacted by the exploit.  BUSD is a stablecoin used to trade crypto assets on the Binance chain.  And, another $134 million was also soon thereafter returned to other impacted owners.  According to Chainalysis, at total of $261 million in cryptocurrencies have been returned to date.

A review of the micro transactions found on Etherscan and BscScan indicates that the “hacker” has been testing literally thousands of ways to move the stolen assets.  In other words, the exploiter does not know what to do with the stolen booty.  A few posts back that up – including one where the “hacker” is allegedly asking for someone to instruct on how to circumvent miner scrutiny.

The “hacker” purportedly also posted:  “WHAT IF I MAKE A NEW TOKEN AND LET THE DAO DECIDE WHERE THE TOKENS GO.”  

As things continued going downhill, the claimed sole perpetrator of the exploit – again claiming such identity solely by virtue of using the perpetrator’s wallet address, allegedly came out as an innocent interloper:

Information posted in the form of a Q&A on an ETH transaction Private Note section goes into further detail:

It’s looking like these posts are all from the same exploiter.  A spreadsheet tracking the exploit – including related communications, can be found on Google docs.  Even if these posts are not genuine, chances are still high the exploit was performed by one or more persons who decided to offload some coin and ultimately decided to give back – as apparently already done to the tune of $261 million, whatever could not safely be absconded with using his/her/their current knowledge.  There were certainly many out there willing to provide the necessary crypto laundering assistance, but apparently the advice was not taken – the clearest signal this was committed by an “ethical” hacker.

Poly Network is at its essence an interoperability protocol used by and integrated with many DeFi projects so this exploit will have direct ripple effects well beyond the Poly Network.  The more indirect impact of this exploit is the slight chance it might be replicated elsewhere by others having the necessary domain knowledge to move stolen assets.  

The best way for investors to minimize the likelihood such failings will not impact them in the future is to seek out and only use DeFi platforms that rely on a holistic “security by design” architecture – something not easily found in a decentralized world. Not surprisingly, in a recent survey nearly 75% of institutional investors and wealth managers state that the security of virtual currencies is a “significant” hurdle stopping many individuals from entering the crypto asset space – let alone the more exotic DeFi domain where software vulnerabilities can still cause the exfiltration of $600 million in digital assets.  Beaches will always have little appeal to swimmers when there are known sharks in the water.

UPDATE: August 12, 2021

Except for $33 million in Tether stablecoins previously frozen by Tether, the entire amount taken was apparently returned. Reuters is reporting that this was done in return for an after-the-fact $500,000 “bug bounty”.

Exchanges May Crack Down on Ransomware OFAC Risk

On April 22, 2021, Chainalysis published its findings on the OFAC sanctions violation risk tied to ransomware payments.  According to Chainalysis, 15% of ransomware payments paid in 2020 were at risk of OFAC sanctions.  Even though lower than the measured risk from 2016 – 2018, last year’s numbers remain an uptick from 2019.  

Chainalysis discovered ransomware victims paid out in 2020 more than $50 million worth of cryptocurrency to addresses that carried sanctions – with mainstream exchanges receiving “more than $32 million from ransomware strains associated with sanctions risks.”  Given the public market embrace of crypto exchanges, it is very likely those exchanges seeking greater regulatory scrutiny will eventually implement curbs to address the OFAC October 2020 advisory – eventually making it more difficult for smaller businesses to satisfy ransomware demands.

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.

B2 – B1 < (P x H)1 – (P x H)2

On February 16, 2021, The Sedona Conference (TSC) – a nonpartisan, nonprofit research and educational institute “dedicated to the advanced study of law and policy in the areas of antitrust law, complex litigation and intellectual property rights”, released its final “Commentary on a Reasonable Security Test“.  TSC is well known for previously helping Courts around the country determine the proper contours of e-discovery.  

Recognizing that cybersecurity reasonableness crosses both legal and technology domains, TSC sought a reasonableness test that would help bridge that divide.  Accordingly, the proposed test for reasonable security was designed to be consistent with “models for determining reasonableness that have been used in various other contexts by courts, in legislative and regulatory oversight, and in information security control frameworks.” The Sedona Conference, Commentary on a Reasonable Security Test, 22 SEDONA CONF. J. 345, 358 (forthcoming 2021).  To that end, this test is ultimately based on the landmark Learned Hand negligence test in United States v. Carroll Towing Co., 159 F.2d 169, 173 (2nd Cir. 1947).  

The Sedona Conference Reasonable Security Test consists of “B2 – B1 < (P x H)1 – (P x H)2” where B represents the burden, P represents the probability of harm, H represents the magnitude of harm, subscript 1 represents the controls (or lack thereof) at the time the information steward allegedly had unreasonable security in place, and subscript 2 represents the alternative or supplementary control.  22 SEDONA CONF. J. at 360.  

TSC’s Commentary should be carefully studied for numerous reasons, including the fact TSC applies it to actual recent enforcement actions and provides solid arguments for its judicial application.  No different than its highly cited e-discovery initiatives, this new TSC approach may very well be relied on by courts tackling the important question of what constitutes reasonable security in the context of a data breach litigation or enforcement action.

Data Privacy Day 2021

On January 28, 2021, the National Cybersecurity Alliance encouraged individuals this Data Privacy Day to “Own Your Privacy” by “holding organizations responsible for keeping individuals’ personal information safe from unauthorized access and ensuring fair, relevant and legitimate data collection and processing.”  Indeed, the NCSA recognizes “[p]ersonal information, such as your purchase history, IP address, or location, has tremendous value to businesses – just like money.”

The NCSA “data as money” perspective is not a new concept.  In fact, it was hoped that Data Privacy Day 2016 would usher in a system for consumers to easily monetize their private data – a hope that has yet to materialize five years later.   Still, in the same way a bank protects money, there can be no adequate privacy without adequate security.

Richard Clarke – a security advisor to four U.S. presidents, properly recognized in 2014:  “Privacy and security are two sides of the same coin.”  The ransomware epidemic of 2020 should inform everyone why Data Privacy Day 2021 solidly places privacy and security on the same level. There can be little respect for the privacy rights of consumers – whether monetized or not, without an adequate effort at securing such data.  Some companies such as Microsoft – last year’s champion of Data Privacy Day, recognize the need to continually push the security envelope in order to properly protect consumer privacy rights. Accordingly, these companies go the extra distance and often work hand-in-hand with law enforcement to take down online criminal enterprises such as Emotet.

Going forward in 2021, companies safeguarding consumer data must recognize that the lines have blurred between nation state APT attacks – focused on the slow espionage of large companies, and criminal enterprises looking for quick financial hits.  For example, the lateral movement hallmarks of an APT attack are now routinely used during Ryuk ransomware exploits.  Moreover, the recent SolarWinds Orion Platform exploit highlights the need to focus on supply chains when protecting consumer data.

Focused security efforts would quickly stop being left on corporate “to do” lists if there was an applicable federal law in place for companies nationwide – not just the hybrid privacy/security state laws now applicable to only some companies.  Unfortunately, despite high hopes in 2019, there was little bipartisan push for a federal privacy law these past few years.  That dynamic might change in 2021.  

Former California Attorney General Kamala Harris’s 2012 annual privacy report opens with the words:  “California has the strongest consumer privacy laws in the country.”  During her tenure, California enjoyed “a constitutionally guaranteed right to privacy, over seventy privacy-related laws on the books, and multiple regulatory agencies set up to enforce these laws.”   As the new year progresses, the current Vice President may very well prod Congress for the sort of California “privacy pride” she once enjoyed on a state level. Given the current one-party rule, there is certainly no longer any excuse available to politicians looking to continue kicking the “federal privacy law can” around Capital Hill.

Ransomware Groups Declare War on US Hospitals

A recent phase of the ongoing two-pronged cyber war between Russia/Iran/North Korea and China against the United States has taken an ugly turn.  The Russian faction has launched various sophisticated ransomware attacks against healthcare providers and hospital systems across the United States.  

As stated in an October 28, 2020 Alert from the Cybersecurity & Infrastructure Security Agency (CISA), there is “credible information of an increased and imminent cybercrime threat to U.S. hospitals and healthcare providers.”  In addition to the CISA Alert, cybersecurity firms battling this latest threat have shared how these latest attacks are perpetrated.

Our current healthcare cyber battle is further complicated given an October 1, 2020 Advisory from U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) reminding ransomware victims against conducting business with those on the OFAC list – including specific ransomware groups such as the Russia-based group behind the Dridex malware.  The OFAC advisory is likely driven by the FBI – which has long advocated against victims making ransomware payments.  No matter what the motivation, however, OFAC has exacerbated the current crisis given the OFAC Advisory warns the primary civil combatants against making violative ransomware payments, namely companies “providing cyber insurance, digital forensics and incident response, and financial services that may involve processing ransom payments (including depository institutions and money services businesses).”

Over the past several years, the cybersecurity community has seen a tremendous uptick in the deployment of ransomware – even leading to board level scrutiny.   No different from SQL injection exploits that were commonly warned against so many years ago yet still remain an exposure for so many websites, ransomware will not go away anytime soon.  The necessary cyber defensive skillset is far from fully disbursed to potential victims.  For example, indicators of compromise (IOCs) shared with the cybersecurity community would likely be ignored by most IT staff given they do not even have the means of searching internally for IOCs within their network.

Taking into consideration the old adage:  “If you fail to plan, you plan to fail,” healthcare providers and hospital systems should immediately seek out specialized cybersecurity experts who are currently fighting this battle before it is too late.

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.