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Yahoo/Altaba Agree to $35 Million SEC Penalty for Failure to Disclose Massive Security Breach

by   |   April 24, 2018

In perhaps the SEC’s first major shot across the bow, Yahoo (now known as Altaba) has agreed to pay the SEC $35 million for failure to disclose a massive security breach to its investors. I’m guessing Equifax, Facebook and a few others are evaluating this result with interest.

According to the SEC’s order, within days of a December 2014 intrusion, Yahoo’s information security team learned that Russian hackers had stolen what the security team referred to internally as the company’s “crown jewels”: usernames, email addresses, phone numbers, birthdates, encrypted passwords, and security questions and answers for hundreds of millions of user accounts. Although information relating to the breach was reported to members of Yahoo’s senior management and legal department, Yahoo failed to properly investigate the circumstances of the breach and to adequately consider whether the breach needed to be disclosed to investors.  The fact of the breach was not disclosed to the investing public until more than two years later, when in 2016 Yahoo was in the process of closing the acquisition of its operating business by Verizon Communications, Inc.

The SEC’s order finds that when Yahoo filed several quarterly and annual reports during the two-year period following the breach, the company failed to disclose the breach or its potential business impact and legal implications. Instead, the company’s SEC filings stated that it faced only the risk of, and negative effects that might flow from, data breaches.  In addition, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings.

According to the SEC order, Yahoo’s senior management and legal teams did not share information regarding the breach with Yahoo’s auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings. Yahoo did not maintain disclosure controls and procedures designed  to ensure that reports from Yahoo’s information security team raising actual incidents of the theft of user data, or the significant risk of theft of user data, were properly and timely assessed to determine how and where data breaches should be disclosed in Yahoo’s public filings, including, but not limited to, in its risk factor disclosures or MD&A.6

While I am sure the SEC expects the matter to cause concern amongst public companies, in an effort to calm nerves an SEC official noted “We do not second-guess good faith exercises of judgment about cyber-incident disclosure. But we have also cautioned that a company’s response to such an event could be so lacking that an enforcement action would be warranted.  This is clearly such a case.”

Yahoo/Altaba did not admit or deny the findings in the SEC order.