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By: Theodore C. Peters
On April 24, 2018, the U.S. Securities and Exchange Commission hit Altaba, Inc. (formerly known as Yahoo) with a $35 million fine. The penalty stems from Yahoo’s failure to disclose a 2014 cyberattack until 2016, even though it knew of the breach within days after it occurred.
In its order, the SEC said that Yahoo’s information security team was promptly advised that Russian hackers had acquired highly sensitive information that Yahoo itself referred to as its “crown jewels,” namely Yahoo usernames, email addresses, telephone numbers, dates of birth, hashed passwords, and security questions and answers for hundreds of millions of accounts. Despite such knowledge, however, Yahoo waited until September 2016, on the eve of a pending sale to Verizon Communications, Inc., before it officially disclosed the breach.
Yahoo’s disclosure of the breach resulted in an immediate 3 percent decline (estimated at $1.3B) of Yahoo’s share price, and caused Verizon to renegotiate the purchase price, lowering it by $350M (representing a 7.5% discount). Before publicly acknowledging the breach, Yahoo released annual and quarterly reports that the SEC concluded were “materially misleading” insofar as “they claimed the company only faced the risk of potential future data breaches that might expose the company to loss of its users’ personal information…”(emphasis added).
Yahoo later amended its risk factor disclosures and MD&A (Yahoo management’s discussion of financial condition and results of operations) to reflect the 2014 breach in its subsequent public filings. On October 9, 2016, Yahoo acknowledged that the breach occurred in 2014. Yahoo also corrected prior public disclosures for 2014 and 2015, which indicated that Yahoo’s disclosure controls and procedures were effective. The amended filings stated that such controls and procedures were not effective.
As part of its agreement with the SEC, Altaba neither confirmed nor denied the statements in the order. Whether further action will be taken against any of the Yahoo executives who were employed at the time of the 2014 cyberattack remains to be seen. Altaba must pay the $35M penalty.
Separately, a U.S. District Court Judge, for the Northern District of California, held off on sentencing of a 23-year-old Canadian “international hacker-for-hire,” Karim Baratov. At an April 24, 2018 sentencing hearing, Judge Vince Chhabria told federal prosecutors that he was concerned that Baratov could potentially face a tougher sentence solely based upon the fact that among Baratov’s clients were certain Russian nationals who committed the 2014 Yahoo cyberattack, even though there was no evidence that Baratov himself was involved in the Yahoo breach. Prosecutors sought a near eight year term of imprisonment. During the sentencing hearing, Judge Chhabria stated that he had “multiple concerns” about the sentence and noted that other hackers engaged in similar conduct had received lesser sentences. Further briefing was ordered on the issue of what national sentencing ranges are for hackers convicted in federal court.
If you have questions or would like more information, please contact Ted Peters at [email protected].