Risk Scenario

The Witches of Adams Hall

Crafty hackers inflict serious reputational damage.
By: | April 24, 2012 • 10 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One

As dawn broke over Boston, collegiate rowers were already knifing through the grey, green-tinged waters of the Charles River in their shells in twos, fours and eights. There was mist on the ground and through it could be seen the blooms of daffodils and azaleas along the walking path that meandered next to the river.


In her dorm room in Adams Hall, Marijke Haddon, an electrical engineering and computer science major, had been up all night and was still hard at work. Just down the hall, so too were her close friends, Greta Milne and Lindsey Rosen.

The three sophomores had been particularly quiet these past three weeks. They had recently come under the influence of Dierdre Livingstone, a political science professor who had become infamous among the faculty for her tendency toward virulent socialist and feminist rhetoric. Another influence, rooted in modern paganism, or Wicca, had influenced the coeds to the point that they had started calling themselves The Witches.

Spurred on by numerous lattes quaffed at a local Coffee Shop, unfiltered nicotine, little sleep and their worship of Livingstone (they could quote whole paragraphs of her book “The Dollar Dragon”), The Witches came to the conclusion that they would use their technology skills to right some perceived wrongs. The three tech-savvy students had been hackers since high school and they were very good at it. Now, they wanted to do something to make their teacher proud.

Oblivious to the spring dawn unfolding outside her shuttered dorm room window, Marijke pushed the “enter” button on her computer, saw what she had done then turned to her iPhone and texted a brief, triumphant message.

“Done!” came the spark of the instant messages to Greta and Lindsey’s iPhone 6S’s. Marijke’s brilliant green eyes flashed as she held her clenched hand to her lips in excitement: She felt the tingles along her scalp under her bleached and dyed dreadlocks threaded with tiny sea shells and multicolored beads.

Marijke, the daughter of Jungian therapists from Mill Valley, Calif., had reason to be proud of herself and her friends. Using a combination of techniques and focusing on a specific weakness they identified in a ubiquitous email server, The Witches had stolen entire email databases from thousands of companies, both large and small.

The massive amount of data (more than 25 terabytes) was stored amongst hundreds of hacked servers around the world configured to create a Scenario_Witchesvirtual RAID-5 array. The beauty of the architecture was that even if as much as 20 percent of the servers failed or were brought down, the system would still function. The Witches were confident that this combination of disbursed storage and redundancy would make it very difficult to shut down the database.

But The Witches were not done yet. Big Data is only as valuable as the meaning that can be derived from it. To that end, The Witches’ crowning achievement was their creation of TRUTH, a search engine that not only made the database searchable by company, topic or executive, but also formatted results to read like dialogue in a novel. Accessible via multiple webpages and apps, TRUTH results were also easily shared and distributed via email, text and social networks.

The Witches’ accomplishment represented a quantum leap beyond Wikileaks. Rather than a massive document dump, this was an organized and highly secured system that presented results understandable to all and easily shared.

Like all well designed user interfaces, the system was dead simple and required no instructions. The Witches pushed out their creation to the world through all available social networks, with a sample search that was sure to grab headlines:

“Discover the #TRUTH. Search ‘Om-Orange and Cheap Labor’ at www.SeeTheTruth.com”.

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Part Two

Om-Orange was not only the most successful new retail store of the 21st century, it also was widely praised as the creator of the first true Post-Modern brand.

OMlogo-pg2-288The company consistently generated astounding gross margins of more than 60 percent by selling yoga and Pilates apparel in urban and upscale markets around the country. But its affluent coastal customers looked to Om-Orange for much more than just clothes. By combining modern marketing techniques with the traditional eastern practices of yoga and Ayurvedic medicine, Om-Orange represented something closer to a religion than a lifestyle. Customers willingly called themselves “Followers” and the company’s tagline “Love Being You,” was referred to as “The Mantra.” In an era of deep skepticism and widespread

pessimism, Om-Orange represented health, happiness and self-fulfillment.

At the center of the movement was the company founder and CEO, Danny Merchant, better known to the Followers as “Chief Guru.”

Danny’s heritage uniquely positioned him to create this powerful combination of commerce and spiritualism. Danny’s grandfather, Simon Merchant, was one of the legends of Santee Alley in Los Angeles’ garment district. From him, Danny inherited a love of textiles and an innate business sense. His mother was a proud “Flower Child” and from her he absorbed the ideals of the 1960s. The duality of his personality carried over to his eduction – he attended Harvard and spent five years traveling through Asia; at one point living in an Indian Ashram. Eventually he made his way back to the U.S. and started Om-Orange in his parents’ garage in Malibu in 2001. Since then his company grew relentlessly.

To the Followers, Danny Merchant was an enlightened leader who demonstrated that people could earn great livings and be spiritually evolved. Wall Street loved Danny for his famously aggressive management style.

But unbeknownst to the the Followers, the key driver of Om-Orange profits had nothing to do with breathing routines or flexibility. The company’s secret sauce was garment fabrication centers in Vietnam and the Philippines that employed cheap labor and had horrendous working conditions. Danny had discovered these centers during his Asian travels. As Om-Orange grew, he formed management teams in Da Nang and Angeles to ensure that the company utilized the cheapest suppliers without regard for the workers.

It wasn’t until John Robinson joined the company in 2006 as its first risk manager that Danny started to feel the drag of morality on his ambitions. The board had insisted on hiring John in preparation for the company’s 2007 IPO. John immediately saw the risks of having such contradictory supply chain and brand strategies. What would it do to Om-Orange’s progressively-themed brand if working conditions in the company’s Southeast Asia factories were exposed?

Danny and John proceeded to have a blunt and brutal battle that mostly took place through a series of email exchanges. At first, Danny was unwilling to give up a strategy that had created such terrific margins and success, and he made his position clear in the most direct and forceful language possible.

John did not back down but chose to remain complimentary of Danny, and focused on the attributes of the brand. In the end, the obviousness of John’s arguments won over the marjority of the board.

To his credit, Danny eventually came to his senses and agreed that it was much too risky for a public company to continue to use the existing manufacturers. John came up with an auditing program, overseen by risk management, to ensure that labor was treated fairly. By the time the company went public, Danny, John and the board felt that the company stood on good ethical ground.

Danny genuinely appreciated John’s counsel and approach. As a result, John was promoted to Chief Risk Officer and became a valuable member of the Om-Orange executive team. John felt that he was living the dream.

Then the Witches of Adams Hall went public with the TRUTH.

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Part Three

The Witches hit a home-run in promoting “Om-Orange and Cheap Labor” as a sample TRUTH search. Below is a copy of the results:


It is hard to overstate the frenzy that was unleashed by the above TRUTH search results as well as additional searches of the Om-Orange emails. Global networks emitted a near audible roar from the sheer volume of tweets, Facebook postings, emails and texts that followed. The formatted excerpts of Danny and John’s exchanges magnified the shock value of the TRUTH revelations as lengthy internal conversations were reduced to easily digested sound bites. Re-enactments based on the dialogues were posted on YouTube and an app was released that would read the dialogue out loud, instantly becoming a hit with late-night TV hosts.

Om-Orange, as part of its errors and omissions coverage with a Europe-based insurer, had a crisis management component. But the public relations consultant retained by the carrier was completely overpowered by the viral flood. No one cared that the incriminating emails were four years old, or that the company had completely changed its ways and was now a model of responsible supply-chain management.

The company’s public relations voice was effectively stifled. There was simply not enough time for the company or its crisis management team to more fully explain the situation or the company’s complete history, and dig the company out of the hole created by the TRUTH revelations.

The most vehement reactions came from the Followers. Feeling betrayed and duped by Danny Merchant, Om-Orange customers organized public “burnings” where former Followers stripped off their Healing Hoodies and tossed them into bonfires. It was as if the intensity of the Followers’ affinity for the brand was directly proportional to their subsequent rage. Watching one such burning in Cambridge, Mass., The Witches of Barton Hall held hands and beamed as the traditional method for the destruction of ancient witches was symbolically turned on their corporate target.

Even though Om-Orange’s story ended in similar fashion to other infamous corporations such as Enron, Worldcom and Lehman Brothers, the speed of its demise was unrivaled. Within weeks, a boycott organized by former followers caused a complete collapse of sales.

Danny, who owned a controlling share of the stock, refused to leave and fought gamely to try and correct the record. But he had already become irrelevant. With the brand in tatters and sales flat-lined, the company could not even sell itself and declared Chapter 7 bankruptcy before the end of the quarter.

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The collision between the Witches and the Followers deeply felt emotions and passions created a perfect storm that inflicted mortal damage to Om-Orange’s reputation. After all, the simplest definition of a brand is the emotional connection a customer feels to the company. Some of the other key points that were raised in this scenario include:

1. Speed kills: Social networks, mobile access and other modern forms of communication have created the ability for information to be distributed almost instantaneously to just about everyone. The time it took the e-mail dialogues on TRUTH to be known around the globe and do substantial reputational damage was about a week.

2. Hackers pose multiple threats: Cyber risks are primarily thought of as related to the destruction of corporate networks, theft of customer data or corporate espionage. But given how much of modern business is now digitally documented, the damage inflicted on a company through a hack-attack is limited only by the assailants motives and imagination. The Witches were successful not only in accessing the emails but also in creating a way to make them easy to read and share.

3. Reputational risks can be fatal: Even if it doesn’t destroy a company, damage can be done extremely quickly and have significant negative impact on a company’s sales or stock price. Case in point – Netflix, where an unpopular business decision caused a digital uproar that translated into a full retreat and punished stock price. The stronger the emotional connection a brand generates, the more successful the brand is; but the more susceptible the company becomes to brand damage. The degree of hypocrisy evidenced in Danny Merchant’s dialogues with his risk manager was fatal because of the extreme connection the Followers felt to Om-Orange.

4. Assume nothing is secret: Is it really possible to create a secure communications environment? Even the U.S. government’s most secret cables and communications have been leaked. Having policies that govern your company’s complete set of communication channels should be as important a priority as any other type of corporate security. Email was a poor communication choice given the nature of the discussions between Danny Merchant and John Robinson.

5.Strong brands are the best defense: As noted in point No. 1, even aggressive crisis management approaches may not be effective due to the short amount of time available to communicate a rebuttal. A strong brand often times can be leveraged to deflect moderate criticism by buying a company time to address issues and concerns. The disclosure that Apple was tracking mobile users didn’t last longer than a few days, in part due to the trust customers have for the Apple brand.

6. Procurement – the next frontier: It’s not just reputational risk that lies in wait for companies that don’t understand the makeup of their supply chains. In the case of Om-Orange, the company’s Southeast Asian manufacturing facilities created a reputational problem. But they just as easily could present a supply-chain problem. Insurance carriers are losing patience with company’s that haven’t fully vetted their supply chains.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]