Leveraged Cybersecurity ETFs Are Debuting At A Dangerous Time

Summary

Direxion launched two leveraged cybersecurity ETFs this past week.

These ETFs may be debuting at a time when the popularity of cybersecurity stocks has already cooled and valuations are still very high.

History has taught us the dangers of investors choosing to chase past performance or chasing “hot” stocks.

It was probably just a matter of time before Direxion – one of the primary issuer of leveraged and inverse ETFs – jumped on the popularity of cybersecurity stocks. This past week, Direxion launched the Direxion Daily Cyber Security Bull 2X Shares ETF (NYSEARCA:HAKK) and the Direxion Daily Cyber Security Bear 2x Shares ETF (NYSEARCA:HAKD) options on the cybersecurity sector. But like many products that get launched after the initial popularity soars, the timing often proves to be a dangerous investor trap.

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SEC nails advisory firm for cybersecurity failure before data breach

An investment advisory firm has agreed to pay $75,000 to settle SEC charges that it failed to have a cybersecurity policy in place before a computer breach compromised 100,000 individuals’ personal information, including records of some of the firm’s clients.

The firm, R.T. Jones Capital Equities Management in St. Louis, also agreed to be censured.

Between September 2009 and July 2013, the firm stored sensitive personal information of its clients and others on a third party-hosted web server, according to a news release from the Securities and Exchange Commission. In July 2013, the web server was breached by an unknown hacker from China who gained access to the data. Though the firm has not received any indication of a client suffering as a result of the breach, it had risked all of its sensitive data, the SEC said.

The firm never adopted written policies and procedures, something the agency has pushed for since April. It did not conduct periodic risk assessments, implement a firewall, encrypt its personally-identifiable information or maintain a response plan for any incidents either. When the breach occurred, it contacted all involved and offered free identity theft monitoring through a third-party vendor.

R.T. Jones Capital Equities Management did not respond to a request comment.

“It is another testament to the fact that every firm should have a set of documented policies and procedures in line with the SEC and Finra mandates,” said Sid Yenamandra, chief executive of Entreda, a cybersecurity and risk-management company, referring to the case. “You’d be amazed how many firms don’t do it.”

Eugene Goldman, a senior member of law firm McDermott Will & Emery and a former SEC prosecutor, said more cases are likely.

“This is the start of a series of similar actions that will be brought this year and next,” Mr. Goldman said. “Further enforcement actions may be derived from deficiencies detected from the SEC’s inspections of advisers.”

The SEC declined to comment.

Mr. Goldman added that there is “the potential seriousness of the consequences of not having these policies and procedures, particularly the risk of not protecting clients from the hackers of personal information.”

It also lessens investor confidence, he said.

Marshall S. Sprung, co-chief of the SEC enforcement division’s asset management unit, said in the news release that the regulator will continue to enforce its safeguarding rules, whether or not there is clear financial harm to clients.

“Every time a breach event like this happens, you’ll see the SEC publicize it more,” Mr. Yenamandra said. “They’re trying to make it an example.”

The case puts a spotlight on the SEC’s mission to enforce more serious cybersecurity regulation.

In a guidance update, the commission’s division of investment management said advisers must not only provide written policies and procedures, but occasionally check the data it collects as well as the vulnerabilities of its systems and security. The Financial Industry Regulatory Authority Inc. has also been pushing for better cybersecurity processes by ramping up its random audits.

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Ex-fugitive and a little bit crazy, cybersecurity legend John McAfee is running for president

A mugshot from earlier this summer, when McAfee was arrested in Tennessee on charges of driving under the influence of prescription drugs.

John McAfee did not kill his neighbor in Belize.I know because I asked him that exact question.

“Do you know what questioning is there? They string you up buy your heels and they put a football helmet on your head. And then they beat that with a baseball bat until your brain turns to mush,” McAfee told me, after denying his involvement.

“It leaves no scar. It leaves no bruise. It’s not something I was doing. If you wanted to do it, I’d be happy to point you to someone who would do that to you,” McAfee said.

I have no doubt that he would.

The 70-year-old former software executive is an enigma: Smart, entertaining, and a little bit of intimidating in a way that keeps you on edge.

His life has fluctuated from drug use to creating a multi-million dollar company and back again. He was accused of murdering his neighbor in Belize – by the press only, he says – and his dog was shot in his military compound by armed soldiers before he fled. He’s since moved back to the US and lives in the one small town in Alabama that has gigabit internet access. He was arrested earlier this summer on charges of driving under the influence and handgun possession. (

McAfee is also running for president of the United States.

And don’t laugh, because he is taking this seriously: He showed up at Techcrunch Disrupt, a three-day San Francisco startup, for a TV interview and stopped by the press room during his campaign visit. He left that night to fly off to do another magazine cover on his campaign trail.

“I will be president. You can laugh all you want. I’ll bet you a dollar. I will be president or I would not be doing this,” he said, as reported by Re/Code.

Meet the Cyber Party

To run for president, McAfee created his own party: the Cyber Party.

He’s against the internet of things, which lets televisions spy on our private conversations. He’s extremely (and justifiably) concerned that a pair of hackers took over a jeep. He hired his friend who hacked the United Airlines entertainment systems (and was subsequently detained) as his chief technology officer to advise him.

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Cyber security firm Zscaler closes $110 million round

The latest recipient in a spate of cyber security investments is Zscaler, a cloud security company that raised $25 million from Google Capital, the search giant’s equity investment arm for late-stage financing.

The investment is an add-on to an oversubscribed $85 million round Zscaler raised in August.

Founder and CEO Jay Chaudhry told Reuters in an exclusive interview he chose to wait for a strategic partner like Google to close out the round.

San Jose, California-based Zscaler provides security for cloud applications for more than 5,000 businesses and organizations, and many of those use Google Inc’s cloud applications and services.

“There is a natural intersection between Google customers and our customers,” he said.

The latest round brings Zscaler’s total funding to $148 million, quadrupling the company’s financing in just the last two months.

It is also the last private financing event before the company makes an initial-public offering, Chaudhry said.

He declined to say when he was planning an IPO, but said he hired a new chief financial officer in March “to make sure everything is ready from a finance point of view and regulatory point of view.”

Chaudhry said the company’s valuation is north of $1 billion, but he declined to provide a more precise figure.

Global cyber security investments so far this year exceed $2.3 billion, according to data from CB Insights and Bain Capital Ventures and analyzed by Reuters. That’s up from $2.5 billion last year and $1.7 billion in 2013.

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Xi Jinping addresses cyber security in Seattle speech

Chinese President Xi Jinping addressed a room of US officials and business leaders in Seattle on the first day of his state visit to the country on Tuesday, with economy and cyber security top of the agenda.

In what is expected to be the only policy speech on his trip, Xi reassured the world that the country’s stock market has reached the “phase of self-recovery and self-adjustment” after a period of volatility since June.

Responding to allegations that Beijing had a hand in cyber attacks against the US, Xi stated that China remains a “staunch defender of cyber security” and intends to “set up a high-level joint dialogue mechanism with the United States on fighting cyber crimes”.

Despite the rhetoric on show, the Wall Street Journal quoted a senior Obama advisor who admitted the need to discuss the issues, saying “we won’t paper over those differences”.

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CYBERSECURITY: DIALOGUE IS BETTER THAN CONFRONTATION

Tuesday, September 22, 2015 – A delegation led by Chinese President Xi Jinping’s special envoy Meng Jianzhu, and comprising leaders from public security, judicial, and cyberspace industries, among others, recently visited the United States. The two sides exchanged views on issues such as mounting a joint effort to crack down on cybercrime. The Chinese side attaches great importance to cybersecurity, which is becoming an increasingly important facet of China-U.S. ties.

Compared to topics the two sides have continuously remained at odds over, such as economic and trade agreements, Taiwan, Tibet and human rights, cybersecurity is a problem that has emerged overnight and could soon become a sticking point between the two countries. The issue has of late been sensationalized in the American press, and it is even reported that the U.S. Government will impose sanctions on Chinese companies and individuals accused of hacking.

The “China cyber threat” theory is a rehash of the “China threat” theory, relocated to cyberspace. Public opinion in America casually decided the cyber-attacks came from China. America claims these cyber-attacks are supported by the Chinese Government and the Chinese military. This is not a persuasive claim. It is widely held by cybersecurity experts around the world that hacking is a global issue. Chinese authorities have repeatedly reiterated that the Chinese Government resolutely opposes and cracks down on hacking attacks in any form. Neither the Chinese Government nor the military would support such actions. However, even such an unequivocal stance seems unable to dislodge the deep-rooted suspicions held in the United States.

The U.S. side has so far failed to provide any tangible evidence proving China is involved in cyber-attacks or businessespionage. On the contrary, a large amount of data exposed by Edward Snowden clearly shows the U.S. Government and some relevant departments have long been engaged in large-scale and organized cyber espionage, monitoring activities against foreign political leaders, companies and individuals, including those from China. America’s surveillance activities are all-pervasive. This undoubtedly has alerted China to its own cybersecurity and increased China’s doubts concerning U.S. cyberspace strategy.

Both China and the United States are big players on the Internet. The United States is widely recognized as having the strongest comprehensive capabilities in cyberspace, while China is rapidly developing in terms of cyberspace and other relevant areas. Both countries are increasing their dependence on cyberspace. But the two countries share more than just a rivalry in this new area, but also wide common interests. Cooperation is required between the nations and will benefit both parties, while confrontation will prove equally hurtful. Like in conventional areas, such as economy, trade and military, this principle suits the unconventional area of cybersecurity. If the United States continues to impose cybersecurity sanctions on China, it will only trigger commensurate reactions from the Chinese side. This will seriously eat away at the strategic trust extant between the two countries, potentially even damaging their long-term interests.

Against a backdrop of increasingly fierce strategic competition, both countries have explored how to manage their differences. Their efforts have thus far proven fruitful. It is unnecessary for one to perish while the other survives in the realm of cyberspace. Both sides can bolster trust and expand cooperation. The signals given during Meng’s visit to the United States were clear: In terms of cybersecurity, dialogue is better than confrontation. The Chinese side seeks dialogue and cooperation rather than opposition and confrontation.

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SEC Details Focus Areas for Next Cyber-Security Exams

The Securities and Exchange Commission will broaden its focus on cyber-security concerns during forthcoming examinations of registered broker-dealers and investment advisers by its Office of Compliance Inspections and Examinations

In April 2014, OCIE announced a series of examinations to identify cyber-security risks and assess preparedness in the securities industry. Building upon the results of those exams, a recently released Risk Alert details expected areas of focus for the second round of cyber-security examinations, which will involve more testing to assess implementation of firm procedures and controls.

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