Zoom Directors Accused of Knowingly Underplaying Security Risks in Shareholder Suit
Since San Jose-based Zoom went public, it was falsely promoted as having "robust security capabilities," including "end-to-end encryption," and although initial offering documents included language about the potential risks of cybersecurity, and that language wasn't indicative of the level of risk known at the time.
July 31, 2020 at 03:55 PM
3 minute read
The original version of this story was published on Delaware Business Court Insider
A new lawsuit has been filed against Zoom Communications Inc., this time in Delaware, where the San Jose, California-based video conferencing company is incorporated.
Shareholder Sara Anderson filed a federal suit derivatively Thursday in the District of Delaware accusing Zoom's directors and officers of unfairly profiting by knowingly failing to disclose the cybersecurity risks posed by the platform.
Anderson's complaint alleges that since Zoom went public in April 2019, it was falsely advertised as having "robust security capabilities," including "end-to-end encryption," and although initial offering documents included language about the potential risks of cybersecurity, that language wasn't indicative of the level of risk known at the time.
Financial reports made in the latter half of 2019 and through the beginning of 2020 contained misleading statements and failed to disclose pertinent information about the status of Zoom users' security, the complaint stated. In actuality, wrote attorney Ryan M. Ernst of O'Kelly & Ernst, Zoom's privacy and security measures were inadequate, the video service was not end-to-end encrypted, and users were at risk of having personal data accessed without authorization, all of which, if made public, would likely decrease the number of people using the platform.
The directors and officers were motivated, Anderson argued, by a desire to make a larger profit selling nearly 3.3 million shares of Zoom stock in total, with CEO Eric S. Yuan and Santiago Subotovsky, a director and chair of Zoom's nominating and corporate governance committee, each reported to have sold more than a million of those shares prior to reports of privacy issues associated with Zoom becoming public. Sales of the shares reportedly netted six of the defendants a total of $172.7 million.
In July 2019, information about potential security threats posed by Zoom surfaced as the Electronic Privacy Information Center filed a U.S. Federal Trade Commission complaint against the company. That complaint accused Zoom of intentionally bypassing users' security settings, allowing the service to remotely access webcams without users' permission.
This spring, when reports were made of Zoom calls being hijacked by unauthorized third-parties, the Federal Bureau of Investigation ultimately issued a statement encouraging those using video conferencing to be aware of potential "Zoom-bombing."
Following an investigation, Zoom reached an agreement in May with New York State Attorney General Letitia James. As a result of the number of people using the platform soaring in recent months as workplaces and schools closed in response to the COVID-19 pandemic, holes in Zoom's security were identified, and the company agreed to encrypt user information and revamp its privacy protection methods.
Anderson is claiming breach of fiduciary duties, waste of corporate assets, unjust enrichment and violations of the Securities Exchange Act. Yuan and CFO Kelly Steckelberg are named as defendants both in the District of Delaware case and also in securities class action suits pending in the Northern District of California.
Ernst and representatives from Zoom's media team did not immediately respond for comment on the case Friday.
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