Equifax and SEC Breaches Show You Can’t Hide from Hackers
Cited as one of the largest incidents of its kind in history, the recent Equifax data breach underscores that every business and individual is vulnerable to theft of sensitive information by unscrupulous hackers. In less than a week following its announcement of the data breach, Equifax was already the subject of dozens of class action lawsuits filed around the country by consumers and shareholders. More lawsuits are likely on the horizon, along with investigations by state and federal regulators. In fact, the high-profile nature of the breach has caused some lawmakers to reconsider the need for new federal legislation for cybersecurity standards and breach notification laws. To make matters worse, widespread media reports may be tarnishing the company’s reputation, its stock price has experienced a precipitous drop, and its chief information and security officer has reportedly retired. The potential adverse legal and financial consequences and reputational risk to the company resulting from this unprecedented breach may have lingering effects for years to come.
Company Announces a Breach
On September 7, 2017, Equifax announced that it was the subject of a cyber-attack that may have exposed highly sensitive information of U.S. consumers. The company purportedly disclosed that hackers had exploited vulnerability in a website application known as “Apache Struts” that supported Equifax’s online dispute web portal. According to its press releases, the company discovered the exploit on July 29, 2017, and took steps to block the suspicious traffic, taking the affected web application offline and patching the application before bringing it back online. On August 2, 2017, the company hired a cybersecurity firm to conduct a forensics investigation to determine the scope of the attack and the data affected. The investigation revealed that the incident impacted 143 million consumers’ personally identifiable information (PII), including names, social security numbers, dates of birth and driver’s license numbers. As one commentator observed, this is akin to the theft by cybercriminals of the “crown jewels” at Equifax.
Class Action Lawsuits Follow
Not surprisingly, Equifax was besieged with dozens of lawsuits filed around the country as soon as news of the data breach reached the public. In less than a week, dozens of class action suits had been filed against the company and its directors and officers. A number of these suits have been filed in Georgia federal court where Equifax is based.
The consumer class actions allege that the breach occurred because Equifax failed to implement security measures that would adequately safeguard individual PII. Plaintiffs contend that the company willfully ignored known weaknesses in its own data security as evidenced by several prior hacking incidents into the company’s computer systems. Plaintiffs allege that Equifax violated its privacy policies in addition to violating various state and federal laws protecting the privacy and security of PII, including the Fair Credit Reporting Act, the Federal Trade Commission Act, the Gramm-Leach-Bliley Act and state consumer protection laws. The complaints also assert common law claims for negligence and breach of contract. Plaintiffs claim that they are at imminent risk of fraud and identity theft for years to come and have suffered (or will likely suffer) injuries as a result of the breach, including unauthorized bank activity; fraudulent credit card transactions; damage to their credit, and money and time expended to prevent, detect, contest and repair their credit; and identity theft or other unauthorized uses of their PII.
Federal Securities Law Violations
While the shareholder class actions against Equifax and its directors and officers similarly arise out of the data breach, these lawsuits are founded on different legal theories for violation of federal securities laws, including sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In these suits, Equifax shareholders allege that the defendants made various material false and misleading representations (or omissions) to investors during the purported class period. In particular, plaintiffs allege that defendants (1) failed to maintain adequate security to protect data; (2) failed to maintain adequate systems to detect data security breaches; and (3) failed to implement and maintain proper security systems, controls and monitoring systems. By failing to disclose these material risks, it is asserted that Equifax’s stock price was purportedly inflated during the class period. When the “truth” was revealed following the company’s announcement of the data breach, Equifax’s share price fell nearly 17 percent, thereby allegedly damaging shareholders who acquired the company’s stock at artificially inflated prices. Notably, the shareholder suits also allege that certain of the company’s officers engaged in insider sales of stock between the time Equifax first detected the hacking attempts and the disclosure of the breach.
Presumably, the various class actions will be consolidated into different categories of cases for consumers, shareholders and others. Assuming the lawsuits survive early motions to dismiss, the litigation could take several years and millions of dollars to resolve.
SEC Data Breach
Following on the heels of the Equifax data breach debacle, the public learned that the U.S. Securities and Exchange Commission’s (SEC’s) Electronic Data Gathering Analysis and Retrieval (EDGAR) database had been hacked in 2016. However, some high-ranking senior officials at the SEC were not aware of the cyber incident until September 2017, when it was made public. The details of the hack – including how it occurred, what information was compromised and the identity of the threat actors – remain scarce. According to a public Statement on Cybersecurity issued by SEC Chairman Jay Clayton on September 20, 2017, hackers exploited a vulnerability to attack in the software of the test-filing component of the EDGAR system, which resulted in access to non-public information used for illicit gain. The SEC’s investigation is reportedly ongoing.
The SEC hack is particularly concerning in light of the fact that the agency is one of the premiere regulators of public companies in the United States. In 2011, the SEC issued guidance advising public companies to disclose any cyber threats or incidents that would be considered material to investors in deciding whether or not to purchase or sell stock in a company. It seems that the SEC did not heed its own advice with respect to timely cyber risk disclosure guidance, given the time lag between the attack and the eventual public announcement. The SEC hack also is troublesome considering the vast amount of non-public corporate information that the agency stores. This is a treasure trove for hackers who can steal the information and trade on it, raising an even bigger question about the integrity of the U.S. financial markets if state-affiliated actors or other hackers steal and manipulate the market price of securities of companies listed on U.S. stock exchanges. Notably, SEC Chairman Clayton also acknowledged that the agency is subject to cybersecurity risk in connection with its vendors: “For example, a weakness in vendor systems or software products may provide a mechanism for a cyber threat actor to access SEC systems or information through trusted paths.” He further noted that this threat is underscored by the expanding global supply chain. As a result, it is increasingly important to scrutinize the potential cyber risk created by outsourced operations and third-party vendors with access to critical systems and sensitive information.
What Organizations Can Do to Mitigate Cyber Threats
Organizations that collect, process or store PII or other confidential or sensitive electronic data should be proactive in managing and mitigating cyber risk. Some steps that companies may take to reduce potential cyber threats include the following.
With proper training, an organization’s employees can be the first line of defense against cyberattacks.
Skip the dull presentation and let employees actively engage in cyber threat simulations, including social engineering and phishing attacks.
Host a cybersecurity awareness day for all employees.
Reward employees for bringing attention to potential cyber threats or security vulnerabilities.
Backing up Data
By regularly backing up electronic data, companies can contain the risk of disruption to their business and operations in the event of a cyberattack.
Make sure that important data is regularly and frequently backed up.
Do not back up data on the same server where the data is stored.
Properly Configuring User Access Permissions
If you are storing data in the Cloud, make sure that access permissions are properly configured to private versus public settings.
Due Diligence on Vendors
Perform due diligence on third-party vendors, including but not limited to information technology, security or Cloud providers.
Make sure that any vendors with access to your organization’s computer systems and electronic data have robust privacy and cybersecurity policies and procedures in place.
Written agreements with vendors should address each party’s respective rights and responsibilities in the event of a data breach.
Reserve the right to conduct cybersecurity compliance audits on your vendors.
Request a copy of your vendor’s most recent cybersecurity risk assessment or gap analysis.
Encryption of electronic data may prevent would-be attackers from misusing this information.
Consider the feasibility of encrypting sensitive or confidential information.
Encrypt all laptops and mobile devices that store sensitive or confidential information or that have access to your organization’s computer system.
Passwords and 2-Factor Authentication
Complex passwords and dual-factor authentication aid in limiting access to authorized users. Consider using dual-factor authentication, including biometric data, tokens, text messages sent to another mobile device or behavior-based authentication tools.
Data Mapping, Retention and Destruction Policies
Most organizations store much more information than they need.
Take an inventory of sensitive and confidential information.
Know where your organization’s “crown jewels” reside.
Create and enforce data retention and destruction policies.
Keep information only as long as you need it or are legally required to keep it.
Cyber Liability Insurance
The costs of a data breach can be exceedingly high, and smaller organizations may not be able to absorb these expenses without a material impact on their finances.
Consider purchasing a cyber liability insurance policy that affords coverage for first-party losses (such as a forensic investigation, notification to impacted parties, remediation, credit monitoring and identity theft restoration solutions) in addition to protecting the company from third-party claims or lawsuits arising out of a data breach.
These types of policies are increasingly made available by a number of insurers and may be tailored to suit the company’s specific business needs.
The premiums for cyber insurance may be relatively nominal when compared with the costs of a data breach.
Incident Response Plan
Every organization should be prepared to respond to a cyber threat or data breach.
Create a robust Incident Response Plan.
Test the Plan at least annually.
Engage pre-vetted vendors and legal advisers to assist you in the event of a breach.
The best defense against a cyberattack is a good offense.
Conduct periodic internal or third-party audits of your organization’s cybersecurity controls, policies and practices.
Update firewalls and anti-virus and anti-malware software.
Install software patches promptly.