United States: SEC And DOJ Hacking Prosecutions Highlight SEC's Increased Interest In Cybersecurity Risks

Last Updated: September 21 2015
Article by Mark Krotoski, Susan D. Resley and Carol E. Head

Companies are reminded of the need for strong internal controls.

The US Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) recently filed civil and criminal actions in the largest hacking and securities fraud scheme of its kind ever prosecuted.1 During a five-year period, the defendants allegedly stole approximately 150,000 confidential press releases from the servers of three newswire companies that contained information prepared by scores of public companies. Unbeknownst to the companies, the defendant hackers, who appear to all be foreign nationals, then sold the press releases to traders who traded ahead of the confidential information's public release and reaped millions of dollars in illegal profits.

This case highlights the need for companies to ensure that they have adequate internal controls that cover data transfer at all stages of the use and life cycle. Any weak link in a cybersecurity program may be exploited or used by hackers as a back door to gain access to information. In this case, the cyber attack targeted third-party newswires and not the companies that originally created and possessed the information. A strong cybersecurity program is essential for companies to protect valuable and sensitive information and to avoid possible enforcement actions, fines, reputational harm, loss of business, and class action or other lawsuits brought for damages suffered by customers or clients.

The SEC's focus is not limited to public companies. Recent findings by the SEC confirm the widespread nature of cybersecurity attacks in the financial industry. In February 2015, the SEC's Office of Compliance Inspectors and Examinations (OCIE) released a Risk Alert announcing that it had examined scores of broker-dealers and investment advisers' cybersecurity protocols.2 Among the areas that the Risk Alert report focused on were identification and assessment of cybersecurity risks, risk associated with vendors and other third parties' systems, detection of unauthorized activity, risks associated with remote customer access, and the absence of a chief information security officer and/or cyber insurance.3 Strikingly, OCIE found that 88% of the broker-dealers and 74% of the investment advisers examined had experienced a cyber attack, either directly or through a vendor.4

The SEC's increased emphasis on the adequacy of internal controls (generally) and cybersecurity at all stages of data transfer (specifically) should particularly interest public companies and financial institutions in their approach to detecting and mitigating cyber risks.

The Attack Targeted Newswires, Not Companies

In the newswires cases, although the material, nonpublic information belonged to public companies, the hackers did not attack the companies directly; rather, they focused on the three newswires. As alleged by the government, the public companies uploaded draft releases to the newswires' restricted, nonpublic servers pursuant to contractual relationships whereby the newswires agreed to keep the information confidential until public release. The press releases contained material nonpublic information about publicly traded companies, including unreleased earnings, revenue, and mergers information. In one instance, the defendants were able to access and trade on information in the 36 minutes between when the newswire received the information and its public release.

The government alleged that the hackers used a range of strategies—some rather simple, such as phishing email and stolen login information, and some more advanced, such as SQL injection attacks5 and brute force attacks6 to access the newswires' servers. For years, the hackers allegedly possessed contact and credential information for one newswire's employees, clients, and business partners. As alleged in one indictment, web server logs from one newswire show repeated and regular improper accesses to its servers.

Rather than attacking each public company, it is clear that the defendant hackers recognized that the newswires offered one single repository and single access point to highly valuable, confidential information about hundreds of companies. The newswires may have also presented a weak link by having weaker cybersecurity measures than the public companies themselves.

As the scheme matured and its success grew, traders allegedly sent "wish lists" of the publicly traded companies about which they sought inside information. The DOJ and SEC alleged the following lucrative nature of the scheme: the hackers obtained confidential information about hundreds of public companies, and the trader defendants executed approximately 1,000 inside-the-window trades, resulting in $30 million in profits.

The SEC has previously targeted hackers who obtain and trade insider information. In 2007, the SEC brought an enforcement action against a computer hacker who accessed confidential quarterly earnings reports by hacking into an investor's public relations firm and obtaining material nonpublic information about upcoming negative earnings of a publicly traded company. In 2010, the hacker was ordered to pay roughly $580,000 in disgorgement, prejudgment interest, and a civil penalty.7

A Strong Detection System Is Necessary for Avoiding Liability

Companies must have a robust system in place, based on internal controls, to prevent, detect, and mitigate direct and indirect cyber attacks. Experts agree that the question is no longer whether an organization will suffer a cybersecurity breach, but when a breach will occur—or whether a breach has already occurred, as yet undetected by the company. Indeed, in the current environment, the key to fighting a cyber attack may be an organization's ability to detect and quickly respond to a breach when it inevitably does occur. Although these recent enforcement actions targeted intentional efforts to steal and profit on material nonpublic information, the SEC's focus goes beyond cybersecurity and insider trading. SEC Chair Mary Jo White has made clear that the agency will continue to bring actions against companies for inadequate internal controls under the "Broken Windows" theory.8

The SEC recently brought an action for failing to have adequate controls in place.9 It also reportedly asked eight listed companies to provide information on data breaches in connection with a sophisticated hacking group "that has tried to hack into emails at more than 100 companies looking for information on mergers and other market moving events."10 In a June 25 speech, SEC Commissioner Luis Aguilar emphasized that the SEC is "proactively examining how it can bring more cybersecurity enforcement actions" and suggested the need for further SEC guidance.11 The SEC has also noted that companies may have disclosure obligations after a cyber attack.12

Other Recent Enforcement Developments

Other federal and state agencies are also initiating aggressive enforcement actions when a company fails to have an adequate cybersecurity program, and the courts have been validating these enforcement efforts. As most recently evidenced by the FTC v. Wyndham decision, the US Court of Appeals for the Third Circuit agreed that the Federal Trade Commission (FTC) had stated a claim for unfair and deceptive trade practices by, inter alia, alleging that the defendant, which experienced three cyber attacks resulting in a theft of consumer data, had not used commercially reasonable methods for protecting consumer data and overstated its cybersecurity protections in its published privacy policy.13 Further, the Third Circuit rejected the defendant's argument that it did not have fair notice of its cybersecurity obligations, citing past FTC actions regarding cybersecurity.

This case confirms that companies' failure to adequately protect valuable and sensitive confidential and customer information may result in an enforcement action. FTC Chairwoman Edith Ramirez noted that the Third Circuit's "decision reaffirms the FTC's authority to hold companies accountable for failing to safeguard consumer data. It is not only appropriate, but critical, that the FTC has the ability to take action on behalf of consumers when companies fail to take reasonable steps to secure sensitive consumer information."14

Preventing and Responding to Data Security Breaches and Keeping Ahead of the Changing Regulatory Environment

What can you do today to protect data? Be proactive. Here are some recommended steps that companies can take now to prevent cybersecurity loss and to strengthen your cybersecurity program.

  1. Protect Valuable Data
    Effective cybersecurity requires a tailored program to protect data that may be at risk. Companies should first identify information of value, such as trade secrets, other intellectual property, confidential business or customer information, or financial assets. A risk assessment should be conducted to mitigate against any weak links that hackers or insiders may exploit. An information protection plan should be carefully tailored and designed to protect the information against risk of attack, theft, or loss.

    Hackers come in all forms with different agendas, from profiteer to "hacktivist." Do you understand which information hackers value and which will cause your company harm? Is high-value information found in multiple locations, including some that might be more vulnerable than others? Have you assessed possible weak links, such as third parties?
  2. Manage Cyber Risk
    Enforcers expect that companies have appropriate oversight and review controls to manage cyber risk. Commissioner Aguilar noted on this point, "Given the significant cyber-attacks that are occurring with disturbing frequency, and the mounting evidence that companies of all shapes and sizes are increasingly under a constant threat of potentially disastrous cyber-attacks, ensuring the adequacy of a company's cybersecurity measures needs to be a critical part of a board of director's risk oversight responsibilities."15

    Consider the following: How do you manage cyber risk? Do you have dedicated information security personnel? Is your board of directors cyber savvy, educated on cybersecurity risks, and able to conduct appropriate oversight, such as reviewing budgets for cybersecurity programs and receiving reports on breaches and risks? Does your board's risk committee consider cyber risks? Does your company have cyber insurance that covers not only the breach, but also data loss and restoration of services?
  3. Monitor and Detect
    Have a clear understanding of your company's ability to monitor and detect attacks. The ability to detect cyber intrusions and attempted intrusions is critical to stopping access. Do you have a detection program in place? How good is it? How well are you monitoring for cyber threats and attacks? In the attack discussed above, the allegations suggest that the newswires varied widely in their detection abilities. The SEC has repeatedly noted the value of detection and monitoring cyber attacks.
  4. Prepare and Test Incident Response Plans
    Does your company's data response plan include a data map that shows your systems, data, needs, and risks? Does it address detection and monitoring of risk, as well as remediation? Does it show when and to whom confidential information is transferred? Does it include third parties that have access to your company's confidential information? Does the data breach identify a response team, including your internal contacts and decisionmakers as well as outside contacts, including counsel, insurance, crisis management, and the appropriate law enforcement? When was the last time that you tested your data response plan?
  5. Third-Party Vulnerabilities
    Review your contracts with third parties and insurance coverage for third-party breaches. The SEC has mentioned third-party vendors as an area of concern, and the recent indictments demonstrate that hackers are targeting third parties. A hack of your company's information by a third party is still a data breach of your information. Have you done due diligence with regard to the cybersecurity system used by third-party vendors? Do your contracts with third-party vendors that have access to your company's confidential information clearly outline obligations in the event of a data breach and cyber attack? Does the third party have appropriate insurance coverage for cyber risks?
  6. Assess and Audit
    Consider auditing a third-party vendor's cybersecurity protocol. Again, a hack of your company's information from a third party is still a data breach of your information. What is your obligation to make sure that your confidential information shared with a third party is protected? Are the third parties that your company trusts with sensitive data taking appropriate steps to protect your confidential data? What is your liability for a breach at a third party? These issues need to be discussed.


[1] United States v. Turchynov, et al., Crim. No. 15-cr-390 (MCA) (D.N.J.); United States v. Kochevsky, et al., Crim. No. 15-cr-381 (E.D.N.Y.) and Securities and Exchange Commission v. Dubovoy et al., Civ. No. 15-cv-6076-MCA (D.N.J.); Press Release, US Department of Justice, Nine People Charged In Largest Known Computer Hacking And Securities Fraud Scheme (Aug. 11, 2015), available here; Press Release, SEC, SEC Charges 32 Defendants in Scheme to Trade on Hacked News Releases (Aug. 11, 2015), available here.

2. SEC, Office of Compliance Inspections and Examinations, Cybersecurity Examination Sweep Summary, National Exam Program Risk Alert, Vol. IV, Issue 4 (Feb. 3, 2015), available here.

3. See our February 2015 LawFlash, SEC and FINRA Publish Materials Addressing Cybersecurity

4. OCIE found that most broker-dealers incorporate requirements relating to cybersecurity risk into their contracts with vendors and business partners (72%) while only a few investment advisers were found to have incorporated such requirements (24%). Similarly, only a slim majority of broker-dealers maintain policies and procedures related to information security training for vendors and business partners authorized to access their networks (51%), whereas fewer than 15% of investment advisers have such policies (13%). Id.

5. SQL injection attacks are methods of gaining access to computers connected to the Internet by using malicious SQL instructions (SQL is a computer programming language to retrieve and manage data in a computer database).

6. "Brute force" refers to a method of decrypting data through exhaustive efforts that can be used to reveal unencrypted passwords.

7. SEC v. Dorozhko, Civ. A. No. 07 Civ. 9606 (NRB) (S.D.N.Y.); Press Release, SEC, SEC Obtains Summary Judgment Against Computer Hacker For Insider Trading (March 29, 2010), available here.

8. Mary Jo White, SEC Chair, Remarks at the Securities Enforcement Forum (Oct. 9, 2013), available here.

9. Evan Charkes, SEC focuses Attention on Chief Compliance Officers, N.Y. L. J. (Aug. 13, 2015), available here.

10. Sarah N. Lynch & Joseph Menn, Exclusive: SEC hunts hackers who stole corporate emails to trade stocks, Reuters (June 24, 2015), available here.

11.Luis A. Aguilar, SEC Commissioner, A Threefold Cord — Working Together to Meet the Pervasive Challenge of Cyber-Crime(June 25, 2105), available here.

12. SEC, CF Disclosure Guidance: Topic No. 2, Cybersecurity (Oct. 13, 2011), available here.

13. F.T.C. v. Wyndham Worldwide Corp., _ F.3d _, No. 14-3514, 2015 WL 4998121 (3d Cir. Aug. 24, 2015), available here.

14. Statement from FTC Chairwoman Edith Ramirez on Appellate Ruling in the Wyndham Hotels and Resorts Matter (Aug. 24, 2015), available here.

15. Luis A. Aguilar, SEC Commissioner, Boards of Directors, Corporate Governance and Cyber-Risks: Sharpening the Focus (June 10, 2014), available here.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Wilson Elser Moskowitz Edelman & Dicker LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Wilson Elser Moskowitz Edelman & Dicker LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions