Gonzalez Lawyers, Judges Debate Data Breach Costs

Written by Evan Schuman
March 25th, 2010

When two Boston-based federal judges sentence Albert Gonzalez Thursday (March 25) and Friday (March 26) for a rash of retail cyber-break-ins that he confessed to orchestrating, the exact sentence may be academic. The key legal argument is shaping up to be this question: “When a retailer is breached, what’s the most reasonable way to determine loss?” The answer is proving to be as baffling—or contradictory–to the federal jurists as it is for most retail CIOs.

For you incarceration enthusiasts out there, with prosecution and defense recommendations running between 17 and 25 years, it’s certainly likely the judges will stay within that range.

Related Story: Gonzalez Psych Report Tells Of 12-Year-Old Sex and Doing 5,000 Pushups

The question of what constitutes a loss in a data breach is complex. Is it limited to what is taken or to what the thief attempts to take? Should the loss include what was actually—and successfully—accessed, or should it assume that when a card with a $10,000 limit is taken, a $10,000 loss—regardless of what the thief did—should be recorded?

If class-action lawsuits are filed (and they will be filed), should the cost of lawyers and courthouse travel be included? What about payment for additional security? And perhaps a new POS system that includes that better security? (While we’re at it, the server room could sure use a new coat of paint. And some better furniture. Definitely some better furniture.) What about the forensics probe? Or the 5-year maintenance deal the forensic team sells you while on site?

Some stretches could even be plausible. For example, what if the breach requires extensive hours from all IT personnel? That’s legitimate. And what if that necessity pushes dozens of unrelated projects to the back burner? What if those delays slow down a product rollout, giving your rivals the time to get to market first and thereby stealing marketshare? Are those reduced sales—which are a direct result of a slower launch, which itself was caused by necessary breach cleanup—something that should be blamed on the thief? On the one hand, the answer may be “yes.” But that answer in turn raises the question of where blame should stop.

The legal foundation for getting into the “what’s really a loss?” issue involves federal sentencing guidelines. To up its sentence recommendation to the maximum—25 years, which the U.S. Attorney’s Office characterized as “imprisonment for life”—the government had to argue that it could prove more than $400 million in losses. That dollar amount forced the issue of defining what a loss is, in the context of a data breach.

Gonzalez’s attorney, for example, issued a subpoena to TJX demanding that the retailer prove it had really lost the $171.5 million it claimed. The March 12 subpoena demanded that TJX give the defense “any and all documents and records of any description, both hard-copy and electronic, including, but not limited to, invoices paid by it, on which TJX bases its claim.”

TJX, understandably, is fighting the subpoena. Gonzalez “argues that TJX has overstated the loss it suffered from the intrusion or, alternatively, that certain of TJX’s expenses that comprised part of its loss were discretionary or were the result of its own negligence,” a TJX filing said. “TJX should not have to expend further time and costs to validate the figures it has presented to the court.” TJX then made an interesting legal point.


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Why Did Gonzales Hackers Like European Cards So Much Better?

I am still unclear about the core point here-- why higher value of European cards. Supply and demand, yes, makes sense. But the fact that the cards were chip and pin (EMV) should make them less valuable because that demonstrably reduces the ability to use them fraudulently. Did the author mean that the chip and pin cards could be used in a country where EMV is not implemented--the US--and this mis-match make it easier to us them since the issuing banks may not have as robust anti-fraud controls as non-EMV banks because they assumed EMV would do the fraud prevention for them Read more...
Two possible reasons that I can think of and have seen in the past - 1) Cards issued by European banks when used online cross border don't usually support AVS checks. So, when a European card is used with a billing address that's in the US, an ecom merchant wouldn't necessarily know that the shipping zip code doesn't match the billing code. 2) Also, in offline chip countries the card determines whether or not a transaction is approved, not the issuer. In my experience, European issuers haven't developed the same checks on authorization requests as US issuers. So, these cards might be more valuable because they are more likely to get approved. Read more...
A smart card slot in terminals doesn't mean there is a reader or that the reader is activated. Then, activated reader or not, the U.S. processors don't have apps certified or ready to load into those terminals to accept and process smart card transactions just yet. Don't get your card(t) before the terminal (horse). Read more...
The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
@David True. The European cards have both an EMV chip AND a mag stripe. Europeans may generally use the chip for their transactions, but the insecure stripe remains vulnerable to skimming, whether it be from a false front on an ATM or a dishonest waiter with a handheld skimmer. If their stripe is skimmed, the track data can still be cloned and used fraudulently in the United States. If European banks only detect fraud from 9-5 GMT, that might explain why American criminals prefer them over American bank issued cards, who have fraud detection in place 24x7. Read more...

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