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Target, other hacked companies face SEC scrutiny over disclosure
From: Audrey McNeil <audrey () riskbasedsecurity com>
Date: Thu, 10 Jul 2014 19:56:14 -0600


The U.S. Securities and Exchange Commission has opened investigations of
multiple companies in recent months examining whether they properly handled
and disclosed a growing number of cyberattacks.

The investigations are focused on whether the companies adequately guarded
data and informed investors about the impact of breaches, according to two
people familiar with the matter who asked not to be named because the
probes aren’t public.

Target Corp., the victim of a breach last year that allowed hackers to
access payment data for 40 million of its customers’ debit and credit
cards, is one of the companies facing SEC scrutiny, according to company

The prospect of enforcement actions against the targets of cyberattacks
marks a new front in the agency’s efforts to combat the rising threat
hackers pose to public companies, brokerages and financial markets.
Previously, the SEC had focused on guiding public companies on how to
disclose those risks and making sure financial companies have adequate
defences against hackers.

“The SEC issues subpoenas when they believe the disclosure is either
incomplete or misleading,” said Linda Griggs, a partner at Morgan, Lewis &
Bockius LLP who previously worked at the SEC as chief counsel to the
agency’s chief accountant. “It’s totally consistent for them to be looking
at this kind of thing.”

Public companies are required to disclose to investors events that are
material to the share price.

Disclosed Breach

Target said in May that the SEC, Federal Trade Commission and states’
attorneys general are “investigating events related to the data breach,
including how it occurred, its consequences and our responses.” As of May
3, the cyberattack has cost Target $52 million, the company said. Target
disclosed the breach one day after it was first reported by journalist and
security blogger Brian Krebs.

The SEC is also investigating companies’ internal controls in cases where
the value of assets could have been affected by a breach, one of the people

How much companies should say about breaches has provoked disagreement
among corporate attorneys, regulators and some activist investors. While
there isn’t an explicit requirement to disclose cyberattacks, public
companies are obliged to tell investors about material events that could
influence their decision to buy or sell shares. In guidance issued three
years ago, the SEC said a cyberattack could be material if it causes a
company to significantly increase what it spends to defend its systems or
when intellectual property is stolen.

Avoid Lawsuits

In a speech last month, SEC Commissioner Luis A. Aguilar urged more public
reporting of cyberattacks. Firms “should go beyond the impact on the
company” and weigh the effect on others, including customers, he said.

Companies typically prefer to keep breaches secret to avoid lawsuits from
people who may have been harmed, according to Douglas Meal, a partner at
Ropes & Gray LLP who has worked with Target and others on data-security

“I really can’t think of a case, and we’ve worked on a lot, where the
disclosure thinking or analysis was driven by the securities laws issues,
frankly,” Meal told a panel convened by the SEC in March.

Proving that a company should have disclosed more about a cyberattack is
difficult because even if a trade secret is stolen, it may not be critical
to a large company’s profit or growth, said Thomas Sporkin, a former SEC
enforcement lawyer who is now a partner at BuckleySandler LLP.

“Materiality is very open to interpretation,” Sporkin said.
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