Technology

Be Wary of ‘Bear Raiders’

Allegations of short-selling based on cyber security rumors create a new vulnerability for risk managers.
By: | April 7, 2017 • 6 min read

Allegations of lax cyber security were responsible for driving down the stock price of a major medical device-maker last summer, even though data was not accessed.

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It is yet another cyber risk that companies need to be wary of.

And even though the device-maker’s vulnerability may have been merely rumor-mongering in an attempt to drive down the stock price, it is a reminder that insureds must work closely with their brokers to ensure there are no gaps between where traditional cyber cover ends, and where policies covering directors and officers (D&O), or errors and omissions (E&O) begin.

“Where business goes, the bad guys follow.” — Steve Bridges, senior vice president of cyber risk and E&O, JLT US Specialty

The case involved St. Jude Medical. It isn’t the only example of possibly short-selling a stock for profit, but it became a bellwether that got everyone’s attention.

The incident occurred when a cyber security operation called MedSec, in collaboration with a hedge fund called Muddy Waters, went public in August 2016 with allegations that pacemakers made by St. Jude Medical were vulnerable to hacking. The company’s stock declined, to the delight of short sellers.

Within weeks of the bear raid, St. Jude Medical sued MedSec and Muddy Waters for defamation.

“The complaint alleged that Muddy Waters sought financial gain ‘by publicly disseminating false and unsubstantiated information’ that frightened and misled patients,” according to the “National Law Review.”

St Jude also “took additional measures to assure patients that cyber security was a priority. In October, St. Jude Medical announced that it had formed a Cybersecurity Medical Advisory Board,” according to the “National Law Review.”

“Further, when the FDA announced that it had identified cyber security vulnerabilities, St. Jude Medical responded the same day with a statement and a software fix that had received the FDA’s stamp of approval.”

By the end of 2016, the Food and Drug Administration issued “final guidance on the post-market management of medical device cybersecurity,” according to a blog by Suzanne B. Schwartz, associate director for science and strategic partnerships at the FDA’s Center for Devices and Radiological Health.

“The best way to combat these threats is for manufacturers to consider cyber security throughout the total product lifecycle of a device,” Schwartz wrote.

“In other words, manufacturers should build in cyber security controls when they design and develop the device to assure proper device performance in the face of cyber threats, and then they should continuously monitor and address cyber security concerns once the device is on the market and being used by patients.”

With doctors and lawyers expressing consternation about the incident, underwriters are urging their insureds to be rigorous in the assessments of their own cyber security, and to take advantage of the capabilities that carriers have assembled for dealing with breaches.

Steve Bridges, senior vice president of cyber risk and E&O, JLT US Specialty

“We have been talking to our clients a lot lately about the new reality of the economy having moved mostly online and relying on networks,” said Steve Bridges, senior vice president of cyber risk and E&O at JLT US Specialty.

“Where business goes, the bad guys follow. The instance of short-sellers profiting from accusations they have floated about a company’s vulnerability is just the online version of the rumors and allegations that have gone on in financial markets from the earliest days.”

There may be more of it now, or it may just be the same level of bear-raiding that just moves faster and wider over electronic media.

One pernicious new angle is a data breach where confidential information about business transactions are accessed, although data is not stolen or damaged.

“We know there have been instances where law firms have been hacked and information about pending deals or other confidential information has been used to trade on companies,” Bridges said. “

Even if it seems as if nothing was stolen or no damage was done, there is still a breach of confidentiality. But then you look at the actual loss, and it can be difficult to determine who was harmed.

“Network security is now a very important part of due diligence before mergers, acquisitions or divestitures,” said Bridges.

He said that a loss in such a situation might fall in a gap somewhere between a cyber policy and a more conventional D&O policy.

“There could also be a reputational risk, but there is not meaningful reputational coverage out there yet.”

In a case like St. Jude’s there does not seem to be a trigger for cyber coverage. “It was reputational,” said Robert Rosenzweig, national cyber risk practice leader at Risk Strategies Co.

“For a company to transfer that risk it would need proper wording in its D&O or a stand-alone reputational policy.”

James Sheehan, cyber risk practice leader, Integro Insurance Brokers

The St. Jude’s bear-raid “gives me pause,” said James Sheehan, cyber risk practice leader at Integro Insurance Brokers. “You would assume there was unauthorized access to the system. Was there exfiltration or manipulation of data?”

The bigger issue, according to Sheehan, is for the Securities & Exchange Commission.

“Was it insider trading, just at a different level? At the same time, insureds need to be thinking about all these threats. They need to be working with their brokers and carriers on how to value their virtual assets.”

In underwriting cyber coverage, two points of contention are the frequency of reporting and the treatment of prior acts. Insureds are disinclined to report frequent breaches, even though it is now widely understood that businesses are under constant attack.

“Noticing every possible attack doesn’t make sense for our clients or the insurers,” said Bridges. “We counsel clients to make decisions on reasonableness and materiality using our collective judgment as to the types of cyber incidents that should be reported.”

Coverage or exclusion of prior acts is a constant issue in cyber coverage. Big losses of data can be the result of trapdoors in the software put in place years prior to a hack being discovered.

“Historically cyber coverage was created out of errors and omissions coverage where retroactive dates made more sense,” said Bridges.

“The market now has adjusted to where you can get a year or two, maybe more.”

There is also the importance of appearance. “The challenge for business is the shift in optics from prevention to detection,” said Rosenzweig.

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“Organizations are constantly aware of intrusions, and they struggle with disclosure, especially if there has been no exfiltration of sensitive information. A lot of companies have stumbled. There is a hassle of reporting and a risk of failure to report.”

Rosenzweig is magnanimous about prior acts. “There has been a lot of improvement in coverage,” he said. “As long as there is no misrepresentation of knowledge of prior acts, some insurers are giving full coverage. Others are at least giving a look back of a few years.

“The complication is that you often don’t know about prior access until you are into the forensics.

“It is especially important for first-time buyers, and also in negotiating about prior acts. I would fight for coverage if an owner really did not have knowledge.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

Verizon’s risk manager David Cammarata loves when his team can make a real impact on the bottom line.
By: | May 2, 2017 • 4 min read

R&I: What was your first job?

I was a financial analyst with the N.J. Casino Control Commission.

R&I: How did you come to work in risk management?

I was told at a Christmas luncheon in 2003 that I was being promoted into a new job.

R&I: What is the risk management community doing right?

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I think the risk management community is getting a lot better at utilizing big data and analytics to manage risk. Significant improvements have been made, but there is still much more room for improvement.

R&I: What could the risk management community be doing a better job of?

I think that the insurance and brokerage communities need to really start thinking about what this industry is going to look like in 10 years. They need to start addressing how they are going to remain relevant. I think that major disruptions to existing business models will occur and that these disruptions combined with innovation and technological advances may catch many of today’s industry leaders by surprise.

David Cammarata, assistant treasurer, risk management and insurance, Verizon Communications Inc.

R&I: What was the best location and year for the RIMS conference and why?

San Diego, any year.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I think the advent of cyber risk and cyber insurance. For several years it has been, and it continues to be, the main topic of discussion at industry meetings.

R&I: What emerging commercial risk most concerns you?

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I think the most scary scenarios include a nuclear, biological, chemical or radiological event, a widespread global health epidemic and/or a widespread state sponsored cyber shutdown.

R&I: How much business do you do direct versus going through a broker?

We do almost all of our business through a broker.

R&I: Is the contingent commission controversy overblown?

No. It’s a conflict.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

Optimistic because hopefully President Trump’s policies (lower taxes and less regulation) will be pro-business and good for the economy.

R&I: Who is your mentor and why?

My dad, who passed away many years ago. He was very influential during the formative years of my career. He taught me how important integrity and reputation were to your brand and he had a very strong work ethic.

R&I: What have you accomplished that you are proudest of?

I would have to say raising two awesome kids. My daughter is graduating from James Madison University this year as co-valedictorian. My son is finishing his sophomore year at Rutgers and has near perfect grades. But more importantly, both of my kids have turned out to be really good people.

R&I: How many emails do you get in a day?

A lot.

“I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.”

R&I: What is your favorite book or movie?

“My Cousin Vinny.” That movie makes me laugh no matter how many times I watch it.

R&I: What’s the best restaurant you’ve ever eaten at?

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My dad used to take me to a place called Chick & Nello’s. It was an Italian place that did not have a menu. They came to your table and told you the two or three items they were making that day. The food was out of this world.

R&I: What is your favorite drink?

Iced tea. The non-alcoholic kind.

R&I: What is the most unusual/interesting place you have ever visited?

I can think of several places but for me it would be a tie between India and Italy. India just has such a different culture and way of life and Rome has breathtaking historical sites.

R&I: What is the riskiest activity you ever engaged in?

Well, one of the best thrill rides I’ve been on was Kingda Ka at Great Adventure. It feels risky but probably isn’t all that risky. I flew in a prop plane with my brother-in-law one time … that felt kind of risky. I have also parasailed, does that count? I think it definitely has to be driving on the N.J. Turnpike day in and day out.

R&I: If the world has a modern hero, who is it and why?

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What about the Fukushima 50? I don’t think I could have done what they did.

R&I: What about this work do you find the most fulfilling or rewarding?

I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.

R&I: What do your friends and family think you do?

I don’t think they really know. My children see me as dad; others just see me as an executive with Verizon.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]