Category Archives: Risk Management

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.

Our Current Cyber Pandemic Will Also Subside

On April 17, 2020, it was reported that researchers at Finland’s Arctic Security found “the number of networks experiencing malicious activity was more than double in March in the United States and many European countries compared with January, soon after the virus was first reported in China. ”

Lari Huttunen at Arctic Security astutely pointed out why previously safe networks were now exposed: “In many cases, corporate firewalls and security policies had protected machines that had been infected by viruses or targeted malware . . . . Outside of the office, that protection can fall off sharply, allowing the infected machines to communicate again with the original hackers. “

Tom Kellerman – a cybersecurity thought leader, distills it this way: “There is a digitally historic event occurring in the background of this pandemic, and that is there is a cybercrime pandemic that is occurring.”

While there are certain internal ways of addressing cybersecurity threats arising from a viral pandemic, the exposures now faced by corporations become doubly damaging when the outside resources absolutely necessary to combat active threats are considered off-budget or not a critical enough priority. Smart companies generally survive stressful times by prioritizing with some foresight. Network security during a Cyber Pandemic should be a top priority no matter what size business.

During our Cyber Pandemic, companies recognizing and properly addressing the potential damage caused by threat actors will not only survive minor short-term hits to their bottom line caused by paying outside resources, they will likely be the ones coming on top after both Pandemics subside. There is definitely a light at the end of the tunnel for those willing to take the ride – just continue using trusted vehicles to get you there.

Addressing COVID-19 Cybersecurity Threats

When implementing COVID-19 business continuity plans, companies should take into consideration security threats from cybercriminals looking to exploit fear, uncertainty and doubt – better known as FUD.  Fear can drive a thirst for the latest information and may lead employees to seek online information in a careless fashion – leaving best practices by the wayside.

According to Reinsurance News, there has already been “a surge of coronavirus-related cyber attacks”.  Many phishing attacks “have either claimed to have an attached list of people with the virus or have even asked the victim to make a bitcoin payment for it.” Not all employees are accustomed to the risks from a corporate-wide work from home (WFH) policy given the previous lack of intersection between work and personal computers. 

One cyber security firm released information outlining these WFH risks. And,  another security provider offers a common-sense refresher:  “If you get an email that looks like it is from the WHO (World Health Organization) and you don’t normally get emails from the WHO, you should be cautious.” In addition to recommendations made by security consultants, there are privacy-forward recommendations that will necessarily mitigate against phishing exploits.  For example, WFH employees should be steered towards privacy browsers such as Brave and Firefox to avoid fingerprinting and search engines such as Duckduckgo for private searches.  A comprehensive listing of privacy-forward online tools is found at PrivacyTools.IO.    

Criminals have already exploited the current FUD by creating very convincing COVID-19-related links.   As reported by Brian Krebs, several Russian language cybercrime forums now sell a “digital Coronavirus infection kit” that uses the Hopkins interactive map of real-time infections as part of a Java-based malware deployment scheme. The kit only costs $200 if the buyer has a Java code signing certificate and $700 if the buyer uses the seller’s certificate. 

At a very basic level, WFH employees should be reminded not to click on sources of information other than clean URLs such as CDC.Gov or open unsolicited attachments even if they appear coming from a known associate.  Now that banks, hotels, and health providers are  sending emails alerting their clients of newly-implemented COVID-19 procedures, it is especially easy to succumb to spear phishing exploits – which is the hallmark of state-sponsored groups.  As recently reported, government-backed hacking groups from China, North Korea, and Russia have begun using COVID-19-based phishing lures to infect victims with malware and gain infrastructure access.  These recent attacks primarily targeted users in countries outside the US but there should be little doubt more groups will focus on the US in the coming weeks. Until ramped up testing demonstrates that the COVID-19 risk has passed, companies are well advised to focus some of their security diligence on these targeted attacks.

This does not mean employees need to be fed yet more FUD – this time regarding network security, without some good news. Employees can be reminded of the fact a decade ago we survived another pandemic. Specifically, between April 2009 and April 2010, there were 60.8 million cases, 274,304 hospitalizations, and 12,469 deaths in the United States caused by the Swine Flu. Globally, the Swine Flu infected between 700 million and 1.4 billion people, resulting in 150,000 to 575,000 deaths. Moreover, the young were a vector for Swine Flu yet are not for COVID-19. And, a large band of 25 – 35 year olds are better in two days – hardly a bad cold, for COVID-19 whereas there was no such band for the Swine Flu. On the downside, COVID-19 has a more efficient transmission mechanism than Swine Flu and we are better suited to develop influenza vaccines than we are for coronavirus vaccines.

Even though we are now on the whole facing a much lesser evil than the Swine Flu we remain exponentially more alarmed and have been withdrawing en mass from social interactions. This is obviously not a good thing but our current pandemic panic should pass by mid-April. Until then, we can continue downing the hottest drink in town just to be on the safe side.

UPDATE: April 23, 2020

The CDC reports in its latest published statistics there were 802,583 reported cases of COVID-19 and 44,575 associated deaths. Without a doubt, this pandemic is certainly much worse that the Swine Flu pandemic as previously reported by the CDC. Moreover, the current “panic pandemic” certainly shows no indications of subsiding.

Whether the governmental measures taken actually ratcheted up the body count or caused them to diminish is left for historians and clinicians to analyze. The hard fact remains the body count keeps going up and the U.S. economy is still on lock down as of April 23, 2020.

UPDATE: May 1, 2020

On April 30, 2020, it was reported Tonya Ugoretz, deputy Assistant Director of the FBI Cyber Division, stated the FBI’s Internet Crime Complaint Center (IC3) is currently receiving between 3,000 and 4,000 cybersecurity complaints daily – IC3 normally averages 1,000 daily complaints.

UPDATE: May 6, 2020

On May 5, 2020, a joint alert from the United States Department of Homeland Security Cybersecurity and Infrastructure Security Agency and the United Kingdom’s National Cyber Security Centre warned of APTs targeting healthcare and essential services.

The alert warned of “ongoing activity by APT groups against organizations involved in both national and international COVID-19 responses.”  This May 5, 2020 alert follows an April 8, 2020 Alert that warned in broader terms of malicious cyber actors exploiting COVID-19.

APTs are conducted by nation-state actors given the level of resources and money needed to launch such an attack.  Moreover, they generally take between eight and nine months to plan and coordinate before launching.  It is particularly disheartening that these recent attacks include those launched by state-backed Chinese hackers known as APT 41.  As one cybersecurity firm points out in a recently-released white paper:  “APT41’s involvement is impossible to deny.” 

Distilled to its essence, the uncovered APT41 attacks mean that before COVID-19 was even on US shores, Chinese state-actors were planning attacks targeting the healthcare and pharmaceutical sectors.  One can only hope the cyberattacks were not coordinated alongside the spread of the virus – a virus that only became public months after a coordinated attack would have been first planned.

University of Rochester Medical Center Gets Hit with a $3 Million HIPAA Fine

On November 5, 2019, the University of Rochester Medical Center (URMC) agreed to a corrective action plan and payment of $3 million due to the 2013 and 2017 loss of an unencrypted flash drive and theft of an unencrypted laptop, respectively.

The apparent reason for the large fine was the fact that “in 2010, [the Office for Civil Rights (OCR)] investigated URMC concerning a similar breach involving a lost unencrypted flash drive and provided technical assistance to URMC. Despite the previous OCR investigation, and URMC’s own identification of a lack of encryption as a high risk to ePHI, URMC permitted the continued use of unencrypted mobile devices.”

As with most OCR enforcement actions, there is typically an industry wide message with each large fine – in this case there are two, namely the failure to encrypt will simply no longer be tolerated and once given a pass by OCR be sure not to waste it.

UPDATE:  December 3, 2019

In keeping with its apparent practice of announcing HIPAA violation resolutions in clusters, on November 7, 2019, OCR announced a $1.6 million penalty against  the Texas Health and Human Services Commission for violations of the Privacy and Security Rules had between 2013 and 2017.  The primary breach occurred when “an internal application was moved from a private, secure server to a public server and a flaw in the software code allowed access to ePHI without access credentials.”  OCR also determined that  in addition to the impermissible disclosure, there was a failure “to perform an accurate, thorough, and enterprise-wide risk analysis that meets the requirements of45 C.F.R. § 164.308(a)(l)(ii)(a) [Security Rule].”  Interestingly, the OCR applied its new civil money penalty caps published in April

And, on November 27, 2019, OCR revealed its enforcement settlement with a hospital network that sent bills to patients containing “the patient names, account numbers, and dates of service” of 577 other patients.  Sentara Hospitals – based in Virginia and North Carolina, did not think such information was protected health information (PHI) and only notified the 8 patients where there was also a disclosure of treatment information.  Given that Sentara “persisted in its refusal to properly report the breach even after being explicitly advised of their duty to do so by OCR”, it was stuck with a $2.175 million penalty.  Given that PHI has been interpreted to include healthcare payment information linked to a specific individual, Sentara was obviously taking a chance when it ignored OCR’s advice. On the other hand, protected health information is expressly defined to mean “individually identifiable health information” so there was at least a colorable argument that payment information – even if related to the provision of healthcare, is not “health information” in any direct sense. 45 CFR § 160.401.

Providing some year-end advice that should also not be disregarded, on December 2, 2019, OCR released its Fall 2019 Cybersecurity Newsletter focusing on ransomware and how covered entities and business associates should apply the Security Rule as a mitigation tool against this threat. 

These latest announcements were clustered to push one primary message, namely do not disregard explicit counsel from OCR given that when it comes to the OCR it most certainly holds a grudge when ignored. In addition, CE’s and BA’s are well advised to deploy an enterprise-wide risk analysis that determines whether there are out-facing vulnerabilities that should be patched. And finally, as shown by the significant amount assessed against the University of Rochester Medical Center, future disregard of encryption as a risk mitigation tool will likely lead to enhanced penalties going forward.

Back to School for Ransomware

Even though the first significant uptick in ransomware attacks began over three years ago, a steady increase in frequency and severity has likely now made ransomware exploits the number one security threat faced by most businesses today.  McAfee places the ransomware growth rate for the last quarter at 118%.  Many smaller businesses were previously on notice but chose to ignore the warning signs. Thankfully, after the 2017 ransomware attacks unleashed by the Wannacry strain of Cryptolocker, some companies did address ransomware risk by implementing better employee training while others decided to upgrade legacy software and initiate offsite backups.

Those who did not adequately address this risk, however, are now facing much larger extortion demands.  Also, the risk landscape has changed dramatically over the past several years with  ransomware becoming an equal opportunity attack that will now target local governments as well as dental offices. Indeed, even first grade students are now being impacted by network security intrusions that not too long ago only previously targeted only large universities. 

Despite the recent public trend of paying these extortion demands, the FBI has long advocated not paying a ransom in response to a ransomware attack. Specifically, the FBI has said:  “Paying a ransom doesn’t guarantee an organization that it will get its data back—we’ve seen cases where organizations never got a decryption key after having paid the ransom. Paying a ransom not only emboldens current cyber criminals to target more organizations, it also offers an incentive for other criminals to get involved in this type of illegal activity. And finally, by paying a ransom, an organization might inadvertently be funding other illicit activity associated with criminals.”

Another result of this increase in activity has been an increase in insurance purchased to cover an extortion demand as well as the related expenses incurred during a ransomware attack.  For example, the City of Baltimore may soon approve spending $835,000 for $20 million in coverage but only because it previously sustained a ransomware attack that set it back over $18 million

In fact, some have argued that by having insurance for this exposure the industry itself is actually at the root of increased ransomware activity.  Those in the security industry correctly point out that what drives these actors turns more on quick conversion rates rather than whether an insurer stands behind a victim.  To suggest the insurance industry is the cause of this problem gives threat actors way too much credit while completely ignoring the benefits derived from the cyber insurance underwriting process.

In the same way it is never too late to go back to school, 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 suggested in 2016:  “Given the serious threat of ransomware, businesses large and small are reminded to at least do the basics – train staff regarding email and social media policies, implement minimum IT security protocols, regularly backup data, plan for disaster, and regularly test your plans.” 

Will Proposed NY and NJ Data Privacy Laws Lead to Federal Preemption?

On June 5, 2019, the NY State Senate passed the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act) to beef up its data breach notification law whereas a month earlier the New Jersey Governor signed into law an amendment to the New Jersey data breach notification law.  This is the first act in what may lead to significant new privacy laws emerging from these sister states.

New York now is now moving on a bill, S5642, that is even more protective than the California Consumer Privacy Act while New Jersey is in the process of merging two proposed bills that may lead in the same direction. There has been opposition to these proposed laws by those companies who have the most to lose by stringent data privacy controls.  

If passed, however, these new laws may actually prod Congress to finally move on a comprehensive privacy framework – one that might preempt aggressive laws such as the ones proposed by New York and New Jersey and the one already passed in California, in favor of a much more tempered approach.  

In other words, the Internet Association and its lobbying partners may actually win the war if these bills are enacted and it can just get Congress to act in a preemptive manner.  Thankfully, the momentum has been consistently on the side of consumer protection and any hope of bipartisan action on the part of Congress remains a long-shot given the current political environment.

OCR Snags $3 Million HIPAA Settlement For Insecure Web Server

On May 6, 2019, the Office for Civil Rights (OCR) announced that Tennessee-based Touchstone Medical Imaging agreed to pay $3,000,000 and adopt a corrective action plan that includes the adoption of business associate agreements, completion of an enterprise-wide risk analysis, and additional comprehensive policies and procedures applying HIPAA Rules. Touchstone – which provides diagnostic medical imaging services, was notified in May 2014 by the FBI that one of its FTP servers allowed uncontrolled access to protected health information (PHI).  This uncontrolled access “permitted search engines to index the PHI of Touchstone’s patients, which remained visible on the Internet even after the server was taken offline.”

During OCR’s investigation, Touchstone acknowledged that the PHI of more than 300,000 patients was exposed including, names, birth dates, social security numbers, and addresses.  OCR’s investigation found that Touchstone “did not thoroughly investigate the security incident until several months after notice of the breach”.  As a result, Touchstone’s notification to individuals affected by the breach was considered untimely.   

Given last year’s summary judgment win by OCR and the facts presented by the Touchstone incident, it is not surprising that this significant settlement – which was one of the largest to date, was reached.  FTP servers have long been a threat vector – even if set up and run properly, so not unlike the clarion calls initiated for encryption and social engineering training, back office IT support should be sophisticated enough to adopt a means of file transfer that applies state of the art security.

Vermont Steps in Front of California with New Privacy Law Aimed at Brokers


Earlier this year, Vermont became the first state to enact a privacy law specifically targeting data brokers. This law, which will become fully effective on January 1, 2019, requires state registration of any business “that knowingly collects and sells or licenses to third parties the brokered personal information of a consumer with whom the business does not have a direct relationship”.

According to Guidance provided earlier this month by the Attorney General’s Office, the type of consumer information subject to this new law includes: “People with incomes over $100,000,” “People who like to play billiards,” or “People preparing for a wedding.” 

Data broker registrations must include information regarding how consumers can opt out of data collection and sales as well as disclosure regarding the number of “data broker security breaches” sustained in the prior year.   This beach notification requirement exists in addition to the one created by Vermont’s data breach law.

In addition to an annual registration, data brokers must also maintain certain protective measures involving those administrative, technical and physical safeguards appropriate for the scope and size of the business or face a potential unfair or deceptive practice claim under the state’s consumer protection law.   

The statutory civil penalties of this new law are actually quite limited given that a data broker required to register who fails to do so will be subject to a penalty of $50 for each day it fails to register, beginning February 1, 2019, up to a maximum of $10,000 per year.  The real bite is found in the potential civil action that may be brought under Vermont’s Consumer Protection Law, namely potential treble damages and reasonable attorneys’ fees. By linking privacy violations with an established consumer protection law, the Vermont statute nicely meshes existing law – and related interpretative rulings, into an effective privacy battle axe.   

While Vermont may never become a real challenger to California when it comes to privacy laws or regulations, this new law could have a ripple effect with other states eventually providing similar protections.  And, given the call for a federal privacy law to harmonize patchwork state laws, the statute can also very easily be a model for certain provisions in a new federal omnibus privacy law.  Combined with other laws that will be vigorously enforced regarding consumer consent, the coming year is shaping up as a strong one for consumer privacy rights.

AT&T crypto theft case may hasten new insurance exclusions

On August 15, 2018, crypto-enthusiast Michael Terpin filed a 69-page Complaint against AT&T in the Central District of California.  This federal action – a fifteen-count missive from Greenberg Glusker, seeks compensation of $24,000,000 for stolen cryptocurrencies as well as punitive damages in the amount of $200,000,000.  Terpin’s counsel seeks to get around standard contractual limitations and arbitration language by claiming that AT&T violated every possible California consumer statute on the books.

At its essence, the lawsuit alleges AT&T did not “implement and maintain reasonable security procedures and practices” regarding personal information and protect it “from unauthorized access, destruction, use, modification or disclosure” as evidenced by a “January 7, 2018 SIM swap fraud” conducted by a criminal who was able to convince an AT&T store employee to give him Mr. Terpin’s SIM card.  Complaint ¶ 238.

In order to obtain recovery in federal court, Terpin’s counsel will have to get around standard ADR language and damages limitations typically found in mobile carrier agreements.  More than likely, the valiant efforts of Greenberg Glusker will be to no avail – with the eventual result this case will move down the well-traveled road of arbitration without any punitive damages or massive discovery in sight.  The Supreme Court authority for such a result is quite extensive and may be why the Complaint is written in such flowery and emotional prose.

No matter what forum eventually takes on this case, it raises numerous issues that percolate beyond the four corners of the Complaint.  For example, will AT&T’s insurer eventually defend or pay out on this claim?  If so, which coverage grants will be triggered?  And, if there is coverage, will ISO or major insurance carriers develop a standard insurance exclusion to bar cryptocurrency theft claims in the future?   As it moves through the California federal court system, this case will definitely have consequences for corporations well beyond AT&T.

EU-US Privacy Shield may soon be suspended

The EU-US Privacy Shield may finally be in actual jeopardy.  It was previously thought that given the high stakes, this data transfer accommodation implemented as a replacement for the judicially invalidated Safe Harbor program was too important an agreement to be withdrawn and that only another judicial ruling could render its death knell.  That is no longer the case.   A vote today by the European Parliament made sure of that.

As reported by the IAPP,  on July 5, 2018 the European Parliament passed a non-binding resolution by a vote of 303 to 223 votes and 29 abstentions to have the European Commission suspend the EU-US Privacy Shield “unless the U.S. is fully compliant” by September 1, 2018.    This is the second September review of the EU-US Privacy Shield.

Between the GDPR requirements left out of the EU-US Privacy Shield, the Cambridge Analytica fiasco that still dogs Facebook, the US’s adoption of the Clarifying Lawful Overseas Use of Data Act (CLOUD Act) – a statute that expressly allows access to trans-border personal data, the US’s pulling out of the Iran deal despite strong pressure from the EU, and the current tariff barbs being sent across the Atlantic, the long-term health of EU-US Privacy Shield can no longer be considered a given.   Companies who have been reliant on this data transfer accommodation should certainly consider alternatives as soon as possible.

UPDATE:  October 23, 2019

As reported in TechCrunch, the EU-US Privacy Shield has withstood its last review given the appointment of an ombudsperson role but there still remains pending litigation targeting it.