August 18, 2021

SEC Charges Issuer with Misleading

Investors About Cybersecurity Incident and
for Inadequate Disclosure Controls
Action Underscores SEC’s Heightened Focus on the Timely and
Effective Remediation and Disclosure of Cybersecurity Incidents

SUMMARY
On August 16, 2021, the SEC charged Pearson plc with misleading investors and failing to maintain
adequate disclosure controls and procedures in connection with a cybersecurity incident. According to the
SEC’s order, Pearson learned in March 2019 about an intrusion involving the exfiltration of millions of rows
of student data, including names and some birthdates and email addresses, as well as usernames and
hashed passwords for school personnel. In July 2019, a periodic filing characterized data privacy incidents
as an ongoing risk factor but failed to disclose that such an incident—and one characterized by the Order
as “material”—had actually occurred. The SEC also found Pearson’s later media statement misleading in
several respects. Additionally, the SEC found that Pearson failed to maintain disclosure controls and
procedures sufficient to appropriately assess cybersecurity incidents for potential disclosure. The Order,
which reflected settled charges, imposed a $1 million penalty. The enforcement action underscores the
recent, increased focus by the SEC on the timely and effective remediation and disclosure of cybersecurity
incidents.

BACKGROUND
Pearson plc (“Pearson”) is an educational publisher and services provider headquartered in the United
Kingdom.1 During the relevant time period, Pearson’s offerings included AIMSweb 1.0, a web-based
software program for tracking students’ academic performance. Using AIMSweb 1.0, school district
personnel could access, update, and run reports on student performance data.

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According to the cease-and-desist order (the “Order”), Pearson learned on March 21, 2019 that a
“sophisticated threat actor” had both accessed and downloaded millions of rows of data from the AIMSweb
1.0 server.2 The SEC found that “[s]ubsequent analysis . . . showed that all the school district personnel
usernames and hashed passwords for AIMSweb 1.0 had been exfiltrated,” as well as “11.5 million rows of
student data” consisting of student names and, for some of the data, birthdates and email addresses. 3 The
Order stated that Pearson had failed to patch the vulnerability that was eventually exploited by the threat
actor, despite receiving notice about the vulnerability and an available patch from the software manufacturer
six months prior.

According to the Order, Pearson “created an incident management response team and retained a third-
party consultant to investigate the breach” but ultimately decided against issuing a public statement.4 On
July 19, 2020, after completing an incident review, Pearson notified the approximately 13,000 customer
accounts impacted by the breach. However, some accounts that had switched to a newer version of the
software but used the same credentials allegedly still remained vulnerable because the notifications failed
to inform school district personnel that their usernames and hashed passwords had been compromised.

On July 26, 2019, Pearson filed a Form 6-K for the first half of 2019. In the form’s section on risk factors,
Pearson listed the risk of “a major data privacy or confidentiality breach” and the negative consequences
that could ensue.5 The SEC found that the phrasing of the statement—“unchanged from prior Forms 6-
K”—suggested that no such incident had actually occurred. 6 According to the Order, “Pearson failed to
consider how certain information about [the AIMSweb 1.0 breach] should have informed this risk
disclosure.”7

On July 31, 2019, Pearson issued a media statement after a reporter contacted the company about the
incident. According to the Order, on the next trading day following the media statement (August 1, 2019),
the company’s stock price on the NYSE fell by 3.3%. The SEC found the media statement misleading
because it (i) characterized the incident as involving “unauthorized access” and “expos[ure of] data,” when
Pearson knew that the threat actor actually removed data from the server; (ii) stated that impacted data
“may” include birthdates/email addresses, when Pearson knew that some of the exfiltrated data did, in fact,
include such information; (iii) stated that impacted data was limited to names (and “may” include
birthdates/email addresses), when Pearson knew that usernames and hashed passwords were also
exfiltrated; (iv) stated that protecting customer information was of “critical importance” to Pearson and
Pearson had “strict data protections in place,” when “Pearson failed to patch for six months after it was
notified” and used an outdated password hashing algorithm; and (v) omitted that the breach involved
“millions of rows of student data.” 8

The Order also found that the breach was “material.”9 Noting that Pearson’s business involved “large
quantities of private data on school-age children,” the SEC found that the company’s “reputation and ability

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to attract and retain revenue” relied in part on the company’s ability to safeguard large amounts of personally
identifiable information.10 The Order also noted that the incident “involved a compromise of a server holding
a large quantity of data Pearson was responsible for protecting,” “exfiltration of a significant number of
student names, dates of birth, and email addresses, and school administrator login credentials,” and “lapses
in Pearson’s protection of that data.”11

Finally, with respect to disclosure controls and procedures, the SEC stated that the processes surrounding
the drafting of the Form 6-K and the media statement “failed to inform relevant personnel of certain
information about the circumstances surrounding the breach.”12 The Order did not identify the relevant
personnel or specify the information about which they were not informed.

On the basis of the allegedly misleading disclosures, the Order charged violations of Sections 17(a)(2) and
17(a)(3) of the Securities Act and violations of Section 13(a) of the Exchange Act and Rules 12b-20 and
13a-16 thereunder.13 The Order also charged a violation of Rule 13a-15(a) of the Exchange Act, which
requires covered issuers “to maintain disclosure controls and procedures designed to ensure that
information required to be disclosed by an issuer in reports it files or furnishes pursuant to the Exchange
Act is recorded, processed, summarized, and reported, within the time period specified” by the SEC. 14
Without admitting or denying the SEC’s findings, Pearson submitted an Offer of Settlement and agreed to
pay a civil money penalty of $1 million and to cease and desist any future violations. 15

IMPLICATIONS
This action is the latest in which the SEC has found a violation of the securities laws where a company
presented cybersecurity or other risk in its periodic filings as merely hypothetical when the risk had in fact
materialized. For example, in 2019, in connection with the Cambridge Analytica scandal, the SEC fined
Facebook $100 million for “present[ing] the risk of misuse of user data as merely hypothetical when
Facebook knew that a third-party developer had actually misused Facebook user data.” 16 In this action,
the SEC similarly focused on the company’s public statement that certain types of data “may” have been
compromised as merely hypothetical when the company knew that such data had, in fact, been
compromised.17 In an environment of heightened cybersecurity risk for companies around the world, the
action underscores the SEC’s continuing focus on ensuring that companies’ statements about cybersecurity
risks and incidents provide timely and accurate information about the nature of the company’s experience.
Companies should ensure that risk factors and other disclosures and public statements are adequately and
timely reviewed on a regular basis, including considering updating risk factors in periodic filings during the
year.

The action also reflects the SEC’s recent, heightened emphasis on disclosure controls and procedures in
cybersecurity, particularly those related to critical software vulnerabilities and timely remediation of
significant cybersecurity incidents. In June 2021, the SEC brought another action based on disclosure
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controls and procedures against First American Financial Corporation alleging, as here, that the company
failed to timely remediate a critical software vulnerability that exposed millions of consumer records and
lacked disclosure controls and procedures sufficient to ensure that accurate information concerning the
incident was escalated to those in charge of the company’s disclosures. 18 These actions also coincide with
the SEC’s widely reported, voluntary request to many companies seeking information about companies’
experience with the compromise of SolarWinds software, which significantly impacted many federal
government agencies and some private sector companies. As we wrote in our client memorandum
addressing the First American action, and this action further confirms, the SEC appears particularly focused
on timely escalation and remediation of cybersecurity risks and incidents at a time when companies across
industries in the United States are experiencing an onslaught of cyberattacks, from systemic supply-chain
and vulnerability compromises to ransomware attacks and cyber-extortion schemes.

Finally, the SEC’s characterization of the company’s underlying cybersecurity incident as “material” is
noteworthy. The core of the SEC’s rationale for that characterization—that the company handles a large
volume of personally identifiable information and thus its reputation and business depend in part on
maintaining the security of that information—may apply to many companies across industries. Further,
while the breach was significant, the categories of data affected in the incident, including dates of birth,
email addresses, usernames and hashed passwords, were no more sensitive than many other types of
personally identifiable information regularly impacted in data breaches, including Social Security, passport,
and credit card numbers and other information. It remains to be seen whether the case signals that the
SEC will implement a broader interpretation of materiality in the cybersecurity breach context. Companies
should consider this uncertainty in assessing their disclosures regarding cybersecurity incidents.

* * *

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 ENDNOTES
1 In the Matter of Pearson plc, Securities Act Release No. 10963, Exchange Act Release No. 92676
(Aug. 16, 2021).
2 Id. at ¶ 3.
3 Id. at ¶ 4.
4 Id. at ¶ 5.
5 Id. at ¶ 7.
6 Id.
7 Id.
8 Id. at ¶ 9.
9 Id. at ¶ 11.
10 Id.
11 Id.
12 Id. at ¶ 13.
13 Id. at ¶¶ 15-16.
14 Id. at ¶ 17.
15 Id. at p. 6.
16 Press Release, Facebook to Pay $100 Million for Misleading Investors About the Risks It Faced
From Misuse of User Data, U.S. Secs. & Exchange Comm’n (July 24, 2019),
https://www.sec.gov/news/press-release/2019-140. See also our previous Client Memorandum,
“FTC Settlement with Facebook Over Privacy Policies Imposes Unprecedented Penalties and
Restrictions,” dated July 26, 2019, available at https://www.sullcrom.com/ftc-settlement-with-
facebook-over-privacy-policies-imposes-unprecedented-penalties-and-restrictions.
17 Similar claims by plaintiffs have also been allowed in private securities litigation. See, e.g., In re
Alphabet, Inc. Sec. Litig., 1 F.4th 687, 703-04 (9th Cir. 2021).
18 Press Release, SEC Charges Issuer With Cybersecurity Disclosure Controls Failures, U.S. Secs.
& Exchange Comm’n (June 15, 2021), https://www.sec.gov/news/press-release/2021-102.

Copyright © Sullivan & Cromwell LLP 2021

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