The Fatally Flawed Assumptions In The Gonzalez Case

Written by Evan Schuman
April 1st, 2010

As attorneys and retailers argued recently about the sentencing and secrecy of Albert Gonzalez’s criminal empire, various fundamental retail realities were forgotten.

Consider, for example, arguments on both sides that JCPenney and Wet Seal would have their stock prices seriously hurt if word of their involvement leaked out. The federal judge overseeing that discussion said any stock impact would be from the retailers’ own doing, but he neglected to point out that there is absolutely no reason to believe there will be any stock impact.

When JCPenney’s lawyer made that argument, the judge should have said, “OK. Well, the names of TJX, BJ’s Wholesale Club, OfficeMax, Boston Market, Barnes & Noble, Sports Authority, DSW, Forever 21, Hannaford and 7-Eleven have already been identified as victims. Show me what kind of stock impact any of them had, limiting it, of course, to stock changes that related to the breach disclosure.” Hint: none of those chains suffered any breach-disclosure-related stock (or, for that matter, revenue) impact.

TJX specifically felt compelled to note in a federal filing last month that it suffered zero stock impact as a result of the breach disclosure. But that shouldn’t be a surprise; none of the victims has reported any—not even a little—revenue drops. This point brings us to the next logic disconnect.

(Related story: JCPenney’s Breach: Differences From Feds, Gonzalez, JCPenney Itself)

JCPenney Attorney Michael Ricciuti argued in a federal filing that disclosing his client’s name “would only cause financial harm to the company, alarm customers needlessly.” That’s a good argument, were it not for that fact that it’s ridiculous. The assumption that such a disclosure could cause financial harm and alarm customers is based on the belief that consumers care in any way about retail security.

If TJX and Hannaford—and the others—have taught us nothing else, they’ve established the seemingly limitless depth of American consumer apathy regarding retail security. First, consumers aren’t paying any attention. But if they did, they wouldn’t care, thanks to the card brands’ zero-liability program. That’s why no meaningful consumer financial losses have been reported in any of these breaches.

From JCPenney Attorney Kevin Walsh, in another filing: “Consumer confidence in the security of JCPenney’s computer systems is almost as important as the reality of that security.” There’s a lot of truth in that statement. But it skates over the fact that “consumer confidence” is predicated on consumers giving a flying magstripe in the first place.

So much for consumer apathy. Let’s move on to retailer cynicism.


3 Comments | Read The Fatally Flawed Assumptions In The Gonzalez Case

  1. Adam Says:

    Just a little nit, you say “absolutely no reason to believe that there will be any stock impact.” but there’s actually a much stronger statement that can be made: “there’s plenty of reason to believe that there will be absolutely no stock impact.”

  2. Todd Michaud Says:

    This entire thing is beyond irritating. If consumers don’t care because of the credit card companies are covering them, and retailers don’t care because their stock prices remain intact and their insurance companies bear the burden of costs associated with breaches, then who exactly does care?

    Here’s a wild idea: let’s make interchange variable depending on your level of IT security (not PCI compliance). Just like the interest rate you pay on a loan varies on how worthy your credit is, let’s make your credit card fees vary on how worthy your IT security is. Missing a firewall in a location? Rate just went up. Virus protection out of date? Rate just went up. Missing some obvious policies and procedures? Rate just went up. Then board members WILL get involved when they realize that potentially millions of dollars of fees are at risk. Retailers have incentive to increase security and the banking entities benefit due to reduced fraud.

  3. Evan Schuman Says:

    Great idea, Todd, but what group is going to determine a retailer’s current IT Security Level? On what criteria?


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