Cybersecurity Litigation Review

This blog post was submitted in dialogue with the recent PLUS webinar “Cyber Risk is a D&O Risk.” You can view the recording of this webinar and past free webinars on the PLUS website here.

If you have blog content you’d be interested in submitting, please reach out to Katie Campbell at kcampbell@plusweb.org.

John Cheffers was hired to be a Director of Research for Watchdog Research in 2019 and creates content that is featured on the company blog.  He obtained his J.D. from Ave Maria School of Law in Naples Florida in 2019, where he was a member of the Law Review and graduated magna cum laude. Prior to that he worked for Audit Analytics as a Research Analyst.

Cybersecurity has gone from a niche concern to a hot topic in the D&O insurance world.  On September 23rd, this week, PLUS hosted a webinar on how companies can strategically handle cybersecurity concerns.  The speakers offered tremendous perspective on this dynamic and growing area, and we encourage everyone to listen to their fascinating conversation.

We are an independent research provider that uses an extensive database of public information to create easy-to-use reports for over 4,500 publicly traded companies.  Since we track cybersecurity incidents and all material litigation for public companies, we thought we could use this as an opportunity to provide a little color to the important discussions concerning cybersecurity.

Overview

We began by looking at incidents that occurred at companies listed on the NYSE and Nasdaq over the past ten years, and the growth rate of cybersecurity incidents is alarming: 

*The graphs and tables in this post were created by Joseph Burke, PhD, and derived the Audit Analytics database.

In 2010, only 0.1 % of companies reported a cybersecurity incident. In 2019, 2.2% of companies reported a cybersecurity incident. The growth of cybersecurity incidents over the past five years has been incredible and it is not clear when it will slow down. 

Another interesting facet is that the risk of a cybersecurity incident is much higher at a large company that it would be at a small company. Attacks on large companies are driving much of the growth in these numbers.

Cybersecurity Security Class Actions

A cyberbreach at a company creates all sorts of problems, including litigation. We identified all the security class action suits that were brought over cybersecurity issues and calculated the likelihood of being named in one of those suits. Unsurprisingly, the last ten years has shown significant growth in the risk of being named in a cybersecurity related lawsuit.

It is important to note that these percentages are for all companies.  Large cap companies have a significantly probability than is represented in the graph because they are both more likely to be the victim of a cybersecurity incident and are generally more likely to have a securities class action suit filed against them.  

Cybersecurity as a Leading and Covariate Indicator

Two of our researchers, Joseph Burke PhD and Joseph Yarbrough PhD, wrote a research paper calculating when particular flags from our reports were associated with an increased risk of securities class action litigation for 2014-2018. Companies with a cybersecurity incident were almost three times as likely to get named in a securities class action lawsuit the year that the incident occurred.

Additionally, cybersecurity incidents were one of the six leading indicators of securities class action suits.  An event is considered a leading indicator of litigation if the occurrence of that event is associated with an increased risk of litigation for the following year. 

Conclusion

The chance of being involved in a cybersecurity securities class action lawsuit is still relatively low, but it is increasing rapidly. Additionally, the risk profile is far higher for large companies, which are more likely to be a victim of a cybersecurity incident and more likely to get named in a securities class action lawsuit. 

If company boards wish to prevent having their company victimized twice (by hackers and by lawyers), then they need to make wise and strategic decisions to confront this growing threat.

Risk Associated with Latest Changes to Same Day ACH

Kurt.SuhsKurtis Suhs
Founder and Managing Director, Cyber Special Ops, LLC

Mr. Suhs serves as the Founder and Managing Director for Cyber Special Ops, LLC,  a cyber risk company that provides its clients with Concierge Cyber®, a revolutionary new delivery solution for cyber risk services modeled on concierge medicine.

The National Automated Clearing House Association (“NACHA”) is making enhancements to offer same day ACH more quickly, allow for larger per-transaction value, and add an additional processing window later in the day.  Here is a brief timeline and explanation of those changes:

  • March 20, 2019– the availability of funds for many Same Day ACH and other ACH credits will occur sooner in the day.
  • March 20, 2020– the per-transaction dollar limit for Same Day ACH will increase from $25,000 to $100,000.
  • March 19, 2021– access will be extended by enabling Same Day ACH transactions to be submitted to the ACH Network two hours later every business day.

So why is wire fraud expected to increase?  Why will it go up when banks are essentially providing the same service to customers that they do today, only giving them their money sooner? Well, the answer is because bad guys love speed and convenience. Same day ACH will enable fraudsters to abscond with money before the bank or its corporate customer even discovers the fraud.

Business Email Compromise Will Increase

In 2019, the FBI’s Internet Crime Compliant Center (IC3) received 23,775 Business Email Compromise (BEC) complaints with adjusted losses of over $1.7 billion. BEC is a sophisticated scam targeting both businesses and individuals performing a transfer of funds. The scam is frequently carried out when a subject compromises legitimate business email accounts through social engineering or computer intrusion techniques to conduct unauthorized transfers of funds.

Account Takeover Will Increase

It is no secret that fraudsters are stockpiling online banking credentials in what we often refer to as “sleeper fraud,” where they keep accounts on hand until they are ready to attack the bank en masse. After same day ACH, we can expect to see escalated levels of account takeover since fraudsters can move the money in larger and faster quantities on compromised accounts.

 Online Banking Losses Will Increase

If you want to see what will happen to U.S. online banking accounts, just look to the U.K. for the most likely scenario.  Online banking losses in the U.K. doubled immediately after Faster Payments launched and never really came back down to the pre-Faster Pay levels afterwards.

Payment Fraud and Bill Pay Losses Will Increase

Organizations that track their ACH and Bill Pay Fraud losses, will probably notice a big uptick in Bill Pay-related fraud losses.  Fraudsters can set up new payees and send funds, or even divert funds to new locations using the same payee accounts by changing the details.  Bill Pay losses will increase with same day ACH.

Time is of Essence

Upon discovering wire fraud, organizations should file a suspicious activity report (SAR) to the FBI’s Internet Crime Complaint Center (IC3).  The mission of the IC3 is to provide the public with a reliable and convenience reporting mechanism to submit information to the FBI concerning suspected internet-facilitated criminal activity and to develop effective alliances with law enforcement and industry partners. Information is analyzed and disseminated for investigative and intelligence purposes to law enforcement and for public awareness. Since the establishment in February 2018, IC3 established the Recovery Asset Team (RAT) that has helped streamline communication with financial institutions and assist FBI field offices in the recovery of funds for businesses that report a fraudulent domestic wire transfer. The RAT, which was established as a standalone team in 2018, completed its first full year of operation in 2019, assisting in the recovery of over $300 million lost through online scams, for a 79% return rate of reported losses. Time is critical, typically within 48 hours of the transfer request, when dealing with BEC, so the RAT can communicate with the domestic financial institutions to freeze funds before they have been transferred.

Best Practices to Minimize Wire Transfer Loss

  • Always verify the authenticity of each wire transfer request. Call the person, using a number you have previously called — not one from the current wire transfer request — to verbally verify it.
  • Implement a call-back verification process when setting up payment instructions for a new vendor or making changes to payment instructions for an existing vendor.
  • Implement dual control and segregation of duties.
  • Set prudent wire transfer limits and/or outright prohibit the ability to initiate overseas wire transfers
  • Educate your employees to protect your financial assets.
  • Perform internal audits to ensure controls set up are being followed.
  • Develop adequate policies and procedures.

Review your business insurance policy. Does it cover financial losses due to theft of money? Coverage might be found in a Crime Policy with a Computer and Funds Transfer Fraud Insuring Agreement, a Business Owner’s Policy that provides coverage for Theft of Money and Securities or a Cyber Policy with Social Engineering Coverage.

New D&O Symposium Session with Matt Salmon

We are excited to announce the addition of Matt Salmon to our annual D&O Symposium line-up!  Matt will be leading a discussion on Illuminating the Dark Web.  Every organization struggles to find a workable balance between security and convenience, and it’s unsettling to know that there are variables out of anyone’s control. Some of the most nefarious activities occur in the shadier corners of the Internet, commonly known as the Dark Web.

In this presentation we will take a journey into the Dark Web and give you a first-hand view into the type of sites that exist in its secrecy, allowing you to look at some of those uncontrollable variables. What do your Boards need to know to be better prepared to make cyber security decisions before a breach happens?  We will use the Dark Web as an avenue to identify nuances and exploitation strategies that are often overlooked. The insight gained from this presentation will help the audience determine potential threat vectors as the first step on the road to protecting yourself and ultimately finding a balance between convenience and security for your organization.

This is a presentation you won’t want to miss!

Haven’t registered yet?  You’ve got time! Click here for Symposium details and registration.

About Matt Salmon

Matt Salmon  – Technical Exploitation Specialist

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Matt is a Cybersecurity expert with nearly a decade of technical and strategic experience. He is CyberVista’s Cybersecurity Manager, lending his technical expertise to the development of training courses. Prior, Matt worked at Booz Allen Hamilton’s Cyber Analytics Center and developed a targeting/analytic tool for exploitation strategy. Additionally, he provided target development and analysis for the FBI. He holds a B.S in Computer Science Engineering and Business from Lehigh University.