Posts Tagged: Patco Construction


13
Aug 14

Tenn. Firm Sues Bank Over $327K Cyberheist

An industrial maintenance and construction firm in Tennessee that was hit by a $327,000 cyberheist is suing its financial institution to recover the stolen funds, charging the bank with negligence and breach of contract. Court-watchers say the lawsuit — if it proceeds to trial — could make it easier and cheaper for cyberheist victims to recover losses.

teciIn May, 2012, Kingsport, Tenn.-based Tennessee Electric Company Inc. (now TEC Industrial) was the target of a corporate account takeover that saw cyber thieves use a network of more than four dozen money mules to siphon $327,804 out of the company’s accounts at TriSummit Bank.

TriSummit was able to claw back roughly $135,000 of those unauthorized transfers, leaving Tennessee Electric with a loss of $192,656. Earlier this month, the company sued TriSummit in state court, alleging negligence, breach of contract, gross negligence and fraudulent concealment.

Both companies declined to comment for this story. But as Tennessee Electric’s complaint (PDF) notes (albeit by misspelling my name), I called Tennessee Electric on May 10, 2012 to alert the company about a possible cyberheist targeting its accounts. I’d contacted the company after speaking with a money mule who’d acknowledged receiving thousands of dollars pulled from the firm’s accounts at TriSummit.

According to the complaint, the attackers first struck on May 8, after Tennessee Electric’s controller tried, unsuccessfully, to log into the bank’s site and upload that week’s payroll batch (typically from $200,000 to $240,000 per week). When the controller called TriSummit to inquire about the site problems, the bank said the site was probably undergoing maintenance and that the controller was welcome to visit the local bank branch and upload the file there. The controller did just that, uploading four payroll batches worth $202,664.47.

[SIDE NOTE: When I spoke with Tennessee Electric’s controller back in 2012, the controller for the company told me she was asked for and supplied the output of a one-time token upon login. This would make sense given the controller’s apparent problems accessing the bank’s Web site. Cyber thieves involved in these heists typically use password-stealing malware to control what the victim sees in his or her browser; when a victim logs in at a bank that requires a one-time token, the malware will intercept that token and then redirect the victim’s browser to an error page or a “down for maintenance” message — all the while allowing the thieves to use the one-time token and the victim’s credentials to log in as the legitimate user.]

On May 9, Tennessee Electric alleges, TriSummit Bank called to confirm the $202,664.47 payroll batch — as per an agreement the bank and the utility had which called for the bank to verbally verify all payment orders by phone. But according to Tennessee Electric, the bank for some reason had already approved a payroll draft of $327,804 to be sent to 55 different accounts across the United States — even though the bank allegedly never called to get verification of that payment order.

Tennessee Electric alleges that the bank only called to seek approval for the fraudulent batch on May 10, more than a day after having approved it and after I contacted Tennessee Electric to let them know they’d been robbed by the Russian cyber mob.

ANALYSIS

This lawsuit, if it heads to trial, could help set a more certain and even standard for figuring out who’s at fault when businesses are hit by cyberheists (for better or worse, most such legal challenges are overwhelmingly weighted toward banks and quietly settled for a fraction of the loss).

Consumers who bank online are protected by Regulation E, which dramatically limits the liability for consumers who lose money from unauthorized account activity online (provided the victim notifies their financial institution of the fraudulent activity within 60 days of receiving a disputed account statement).

Businesses, however, do not enjoy such protections. States across the country have adopted the Uniform Commercial Code (UCC), which holds that a payment order received by the [bank] is “effective as the order of the customer, whether or not authorized, if the security procedure is a commercially reasonable method of providing security against unauthorized payment orders, and the bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer.”

Under state interpretations of the UCC, the most that a business hit with a cyberheist can hope to recover is the amount that was stolen. That means that it’s generally not in the business’s best interests to sue their bank unless the amount of theft was quite high, because the litigation fees required to win a court battle can quickly equal or surpass the amount stolen. Continue reading →


16
Jun 14

Ruling Raises Stakes for Cyberheist Victims

A Missouri firm that unsuccessfully sued its bank to recover $440,000 stolen in a 2010 cyberheist may now be on the hook to cover the financial institution’s legal fees, an appeals court has ruled. Legal experts say the decision is likely to discourage future victims from pursuing such cases.

Choice Escrow and Land Title LLC sued Tupelo, Miss. based BancorpSouth Inc., after hackers who had stolen the firm’s online banking ID and password used the information to make a single unauthorized wire transfer for $440,000 to a corporate bank account in Cyprus.

BancorpSouth’s most secure option for Internet-based authentication at the time was “dual control,” which required the customer to have one user ID and password to approve a wire transfer and another user ID and password to release the same wire transfer. The other option — if the customer chose not to use choose dual control — required one user ID and password to both approve and release a wire transfer.

Choice Escrow’s lawyers argued that because BancorpSouth allowed wire or funds transfers using two options which were both password-based, its commercial online banking security procedures fell short of 2005 guidance from the Federal Financial Institutions Examination Council (FFIEC), which warned that single-factor authentication as the only control mechanism is inadequate for high-risk transactions involving the movement of funds to other parties.

A trial court was unconvinced, and last week The 8th Circuit Court of Appeals found essentially the same thing, while leaning even more toward the defendants.

“It’s a good opinion for banks [and] it’s definitely more pro-bank than pro-consumer,” said Dan Mitchell, a lawyer who chairs the data security practice at Bernstein Shur in Portland, Maine. “The appellate court found the same thing as the basic court. The customer was offered dual controls — that two people should be required to sign off on all transactions — and they were informed that it was important for them to take advantage of this. So, when [Choice Escrow] made an informed decision in writing not to use dual controls, the bank was careful to document that.”

Perhaps most significantly, Mitchell said, the decision could be a blow to companies trying to recover cyberheist losses from their banks. Bancorp South had asserted at the trial court level that its contract with Choice Escrow indemnified it against paying legal fees in such a dispute. The trial court dismissed that claim, but the appeals court said in its decision that the bank could recover the costs from the escrow firm. Continue reading →


26
Mar 13

Missouri Court Rules Against $440,000 Cyberheist Victim

A Missouri court last week handed a legal defeat to a local escrow firm that sued its financial institution to recover $440,000 stolen in a 2009 cyberheist. The court ruled that the company assumed greater responsibility for the incident because it declined to use a basic security precaution recommended by the bank: requiring two employees to sign off on all transfers.

courthouseSpringfield, Mo. based Choice Escrow and Land Title LLC sued Tupelo, Miss. based BancorpSouth Inc., after hackers who had stolen the firm’s online banking ID and password used the information to make a single unauthorized wire transfer of $440,000 to a corporate bank account in Cyprus.

Choice Escrow alleged that BancorpSouth’s security procedures were not commercially reasonable. Choice pointed out that the bank’s most secure option for Internet-based authentication relied principally on so-called “dual controls,” or requiring business customers to have one user ID and password to approve a wire transfer and another user ID and password to release the same wire transfer.

Choice Escrow’s lawyers argued that because BancorpSouth allowed wire or funds transfers using two options which were both password-based, its commercial online banking security procedures fell short of 2005 guidance from the Federal Financial Institutions Examination Council (FFIEC), which warned that single-factor authentication as the only control mechanism is inadequate for high-risk transactions involving the movement of funds to other parties.

But in a decision handed down on March 18, 2013, a judge with the U.S. District Court for the Western District of Missouri focused on the fact that Choice Escrow was offered and explicitly declined in writing the use of dual controls, thereby allowing the thieves to move money directly out their account using nothing more than a stolen username and password.  The court noted that Choice also declined to set a limit on the amount or number of wire transfers allowed each day (another precaution urged by the bank), and that the transfer amount initiated by the thieves was not unusual for Choice, a company that routinely moved large sums of money.

Continue reading →


6
Jul 12

Court Ruling Could Be Boon to Cyberheist Victims

A decision handed down by a federal appeals court this week may make it easier for small businesses owners victimized by cyberheists to successfully recover stolen funds by suing their bank.

The U.S. Federal Court of Appeals for the First Circuit has reversed a decision from Aug. 2011, which held that Ocean Bank (now People’s United) was not at fault for a $588,000 cyberheist in 2009 against one of its customers — Sanford, Me. based Patco Construction Co. The appeals court sent specific aspects of the earlier decision back to the lower court for review, but it encouraged both parties to settle the matter out of court.

The appeals court in Boston called the bank’s security systems “commercially unreasonable,” reversing a lower court ruling that Ocean Bank’s reliance on passwords and secret questions was in line with guidance set out by federal banking regulators. A copy of the decision is here (PDF).

Charisse Castagnoli, a bank fraud expert and independent security consultant, said the decision could open the door lawsuits from small businesses that have been similarly victimized with the help of outdated security procedures at their banks.

“What this opinion offers is a strong basis for victims to challenge the security implementations of their banks regardless of whether they agreed that the implementation was ‘commercially reasonable’ at a single point in time in a ‘shrink wrap’ type contract,” Castagnoli said.

Continue reading →


17
Jun 11

Court Favors Small Business in eBanking Fraud Case

Comerica Bank is liable for more than a half a million dollars stolen in a 2009 cyber heist against a small business, a Michigan court ruled. Experts say the decision is likely to spur additional lawsuits from other victims that have been closely watching the case.

Judge Patrick J. Duggan found that Dallas-based Comerica failed to act “in good faith” in January 2009, when it processed almost 100 wire transfers within a few hours from the account of Experi-Metal Inc. (EMI), a custom metals shop based in Sterling Heights, Mich. The transfers that were not recovered amounted to $560,000.

“A bank dealing fairly with its customer, under these circumstances, would have detected and/or stopped the fraudulent wire activity earlier,” Duggan wrote. Judge Duggan has yet to decide how much Comerica will have to pay.

The problems for Experi-Metal started when company controller Keith Maslowski responded to an e-mail that appeared to be from its bank, Comerica. The message said the bank needed to carry out scheduled maintenance on its banking software, and instructed the EMI employee to log in at a Web site that appeared to be Comerica’s online banking site. Maslowski said the email resembled the annual e-mails Comerica used to send, prompting customers to renew EMI’s digital certificates.

The year before the cyber theft, Comerica had switched from using digital certificates to requiring commercial customers to enter a one-time passcode from a security token. The site linked to in the e-mail asked for that code, and Maslowski complied. Within the span of a few hours, the attackers made 97 wire transfers from EMI’s account to bank accounts in China, Estonia, Finland, Russia and Scotland.

Comerica became aware of the fraudulent transfers four hours after the attack began. Although it took steps to isolate Experi-Metal’s account, the bank also failed to stop more than a dozen additional fraudulent transfers from the company’s account after the bank’s initial response. Experi-Metal sued the bank after it refused to cover any of the losses.

Continue reading →


8
Jun 11

Court: Passwords + Secret Questions = ‘Reasonable’ eBanking Security

A closely-watched court battle over how far commercial banks need to go to protect their customers from cyber theft is nearing an end. Experts said the decision recommended by a magistrate last week — if adopted by a U.S. district court in Maine — will make it more difficult for other victim businesses to challenge the effectiveness of security measures employed by their banks.

In May 2009, Sanford, Maine based Patco Construction Co. filed suit against Ocean Bank, a division of Bridgeport, Conn. based People’s United Bank. Pacto used online banking primarily to make weekly payroll payments. Patco said cyber thieves used the ZeuS trojan to steal its online banking credentials, and then heisted $588,000 in batches of fraudulent automated clearing house (ACH) transfers over a period of seven days.

In the weeks following the incident, Ocean Bank managed to block or claw back $243,406 of the fraudulent transfers, leaving Patco with a net loss of $345,445. Because the available funds in Patco’s account were less than the total fraudulent withdrawals, the bank drew $223,237 on Patco’s line of credit to cover the transfers. Patco ended up paying interest on that amount to avoid defaulting on its loans.

Patco sued to recover its losses, arguing in part that Ocean Bank failed to live up to the terms of its contract when it allowed customers to log in to accounts using little more than a user name and password. On May 27, a magistrate recommended that the court make Patco the loser by denying Pacto’s motion for summary judgment and granting the bank’s motion.

David Navetta, a founding partner of the Information Law Group, said that Patco has about another week to dispute the magistrate’s recommendations, but that it is unlikely that the judge overseeing the case will overturn the magistrate’s findings.

Navetta said the magistrate considered the legal issues and propounded an analysis of what constitutes “commercially reasonable” security.

“Many security law commentators, myself included, have long held that reasonable security does not mean bullet-proof security, and that companies need not be at the cutting edge of security to avoid liability,” Navetta said. “The court explicitly recognizes this concept, and I think that is a good thing.”

But Avivah Litan, a fraud and bank security analyst at Gartner, took strong exception to the way the magistrate arrived at the recommended decision, calling it “an outrage.”

“In my opinion, this is frankly an egregious injustice against small U.S. businesses,” Litan said. “It is also a complete failure of the bank regulatory system in the United States, which should come as no surprise, given the history of the regulators in the 21st century.”

Continue reading →