United States: Recent Developments In Securities Class Actions And Companies' Disclosure Obligations Regarding Cybersecurity Risks And Events

Last Updated: March 12 2018
Article by Robert MacAneney

Public companies experiencing data security incidents have been largely successful in defeating derivative actions and securities class actions related to those cyber incidents. Nevertheless, some recent events may encourage shareholder attorneys to pursue securities fraud class actions after disclosure of a cyber incident leads to a drop in the stock price. This article addresses two of those events: this week's announcement of the settlement in the Yahoo!, Inc. securities fraud class action, and the SEC's recent guidance on public company disclosures of cyber risk.

The $80 Million Yahoo Securities Class Settle Action Settlement

On March 5, Yahoo, Inc. ("Yahoo") announced a proposed settlement, in In re Yahoo Inc. Securities Litigation, which was filed in U.S. District Court in San Francisco. The $80 million proposed settlement relates to a securities class litigation stemming from Yahoo's 2013 and 2014 data breaches. While many elements of the Yahoo securities class action may be factually unique, the settlement is a milestone because it is the first significant securities fraud settlement from a cybersecurity breach.

In January 2017, the first of several securities class action lawsuits was filed against Yahoo and certain of its directors and officers in the Northern District of California. Plaintiff shareholders alleged that defendants' brazenly failed to disclose the two largest data breaches in U.S. history, in which hackers stole the records of 3 billion users in 2013, compromised the accounts of 500 million users in 2014, and caused financial harm to its investors. They further alleged that defendants failed to disclose two additional massive data breaches in 2015 and 2016, which affected approximately 32 million Yahoo users and caused financial harm to its investors.

It is also alleged that, throughout the class period, defendants continued to reassure the public that Yahoo had "physical, electronic, and procedural safeguards that comply with federal regulations to protect personal information about [its users]," that it would publicly disclose all security vulnerabilities within 90 days of discovery, and that its data security employed "best practices," among other misrepresentations. Plaintiff shareholders alleged that defendants knew but failed to disclose that Yahoo was employing grossly outdated and substandard information security methods and technologies, which had resulted in two of the largest data security breaches in history.

The complaint alleges that defendants made false or misleading statements or failed to disclose that:

  • Yahoo failed to encrypt its users' personal information and/or failed to encrypt its users' personal data with an up-to-date and secure encryption scheme;
  • Sensitive personal account information from more than 1 billion users was vulnerable to theft; and,
  • It was foreseeable that a breach resulting in the theft of personal user data would cause a significant drop in users of Yahoo's websites and services.

The stipulation of settlement does not say how the settlement will be funded. It states only that Yahoo will "pay the settlement or cause it to be paid." The stipulation of settlement expressly includes defendants' insurers, which is not unusual. A description of how the settlement is to be funded mentions providing the insurers with information, which strongly suggests that the D&O insurers are funding at least some portion of the settlement.

To date, public companies have largely succeeded in defeating cyber-related claims against directors and officers. The Yahoo settlement, combined with recent announcements from the U.S. Securities and Exchange Commission's (SEC), discussed below, could very well change this trend.

U.S. Securities and Exchange Commission's Updated Guidance on Cybersecurity Disclosure1

Interestingly, the Yahoo proposed settlement was announced on the heels of the SEC's recently updated guidance on cybersecurity disclosure. On February 21, the SEC issued new guidance calling on public companies to be more forthcoming when disclosing cybersecurity risks. The 2018 guidance on cybersecurity disclosure for public companies updates the language the SEC released in 2011 regarding cyber risks and their impact on investment decisions. Under the new cybersecurity disclosure standards, SEC Chairman Jay Clayton stated that the goal is to ensure that companies provide "more complete information" to investors about cyber risks and incidents.

In its 2018 Disclosure Guidance, the SEC emphasized the importance of disclosing material cybersecurity risks, even in cases where a company has not yet suffered a cyberattack. The SEC noted that effective disclosure controls and procedures are best accomplished when directors, officers, and other key management personnel are informed about their entity's cyber risks.

The primary objective of the updated SEC guidance is for board directors and company executives to review their controls and procedures to ensure they properly discharge their cybersecurity disclosure responsibilities.

SEC Chairman Clayton stated "I believe that providing the Commission's views on these matters will promote clearer and more robust disclosure by companies about cybersecurity risks and incidents, resulting in more complete information being available to investors. . . In particular, I urge public companies to examine their controls and procedures, with not only their securities law disclosure obligations in mind, but also reputational considerations around sales of securities by executives."

The guidelines caution public companies to "take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyberattack." Additionally, the SEC guidance makes it clear that if investors are kept in the dark about security incidents, not only should companies expect class action suits, but the SEC intends to actively investigate such matters as well. In the agency's words, the SEC "continues to monitor cybersecurity disclosures carefully."

The guidelines note that the responsibility for clear and expedient disclosure falls squarely on the shoulders of board directors. The board is responsible for ensuring that the organization has appropriate disclosure controls and procedures "to make accurate and timely disclosures of material events." This includes guidance to public companies on how and when they should disclose cybersecurity risks and breaches, including potential weaknesses that hackers have not yet targeted.

The SEC's 2018 Statement and Guidance on Public Company Cybersecurity Disclosures reminds regulated entities that the federal securities laws may apply to cyber risk, cyber events, and any related disclosures or disclosure requirements. The guidelines observe that cybersecurity risk management policies and procedures are key elements of enterprise-wide risk management, including compliance with the federal securities laws. Companies are encouraged to adopt comprehensive policies and procedures related to cybersecurity and to assess their compliance regularly, including the sufficiency of their disclosure controls and procedures as they relate to cybersecurity disclosure. Companies should assess whether they have sufficient disclosure controls and procedures in place to ensure that relevant information about cybersecurity risks and incidents is processed and reported to the appropriate personnel, including up the corporate ladder. The goal is to enable senior management to make disclosure decisions and certifications and to facilitate policies and procedures designed to prohibit directors, officers, and other corporate insiders from trading on the basis of material nonpublic information about cybersecurity risks and incidents.

The message should be clear that regulated companies must be prepared for potential cybersecurity exams by the SEC, the Financial Industry Regulatory Authority (FINRA), or state regulators. Conducting comprehensive cybersecurity program assessments under privilege can help to both prepare organizations for these exams as well as mitigate risks of problematic findings and/or noncompliance.


In the past, public companies have defeated plaintiffs' efforts to seek recovery through securities class actions relating to cybersecurity risks and events. However, recent events suggest that may change. These types of claims likely will become a major issue for companies in 2018 and beyond. The new SEC guidelines and the Yahoo settlement may provide the necessary groundwork that enables plaintiffs' law firms to bring securities actions to pursue these claims.

In this regard, another class action securities case recently filed in the cybersecurity context may provide further guidance. Earlier this year, two class action lawsuits were filed against Intel Corporation after the vulnerabilities relating to the Meltdown and Spectre CPU flaws were publicized. The Meltdown and Spectre flaws were present in CPUs dating back to 1995 and a Google security team informed Intel about chip vulnerabilities in June 2017. According to a recent announcement by Intel, the total has grown to 32 multi-party suits by customers and two securities suits.

The shareholder actions assert that Intel violated securities laws when it assured its products were safe to use - assurances the Meltdown and Spectre flaws revealed to be untrue. Shareholders allege that "Intel and certain officers violated securities laws by making statements about Intel's products and internal controls that were revealed to be false or misleading by the disclosure of the security vulnerabilities." The plaintiffs further allege that the defendants breached their duties to Intel by failing to take action in relation to alleged insider trading."

While the facts at issue in Intel are notably different from those of Yahoo, because they relate to disclosures concerning Intel's flawed chips and not to a cybersecurity breach at Intel, it will be interesting to see if the Intel securities litigation is the next disclosure related case in a cybersecurity context that leads to a significant settlement. Also, given the unique facts involving the world's leading producer of microchips, it will also be interesting to see if the cybersecurity breaches attributed to those flawed chips lead to further litigation against Intel from customers whose data was hacked. The Intel securities actions are another indication that plaintiffs' law firms continue to pursue securities litigation relating to disclosures in the cybersecurity context which lead to a decline in a company's stock price. The Intel securities actions are still in their earliest stages. However, it will be interesting to see to what extent they are part of a trend, and impact securities litigation, in general, as it relates to cybersecurity disclosure risks and events.


1 https://www.sec.gov/news/press-release/2018-22

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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
Cadwalader, Wickersham & Taft LLP
Shearman & Sterling LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Shearman & Sterling 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