Better The Devil You Know? Dangers Of Corporate Hacking

By: James W. Kraus

hackingCorporate America has been rocked recently by revelations of hacking into company-wide computer systems from overseas, including concerns that the unlawful conduct is state-sponsored.  The more likely and immediate threat to all corporate systems, however, is the damage that can be done by individuals within or recently departed from a company.  A prime example of this problem is the hacking of the computer system of Dallas-based Exel Transportation Services by its former president Michael Musacchio and other former employees.  The case culminated with the conviction of Musacchio on Friday by a federal jury in Dallas for conspiring to hack into his former employer’s computer network.  United States v. Musacchio, No. 3:10-cr-00308-P (N.D. Tex.)

The Mussachio case represents a cautionary tale, both to companies concerned with cyber security and entrepreneurs looking for an edge against competition.  The genesis for the wrongful conduct was the desire for a market advantage by individuals who had left Exel to form a competing venture, Total Transportation Systems, LP, in 2004.  Now, with the settlement of a civil suit between the companies and three federal convictions in its wake, the Exel case stands as a stark reminder of how sensitive corporate information can be compromised by the combination of outrageous conduct by former company officials and a company computer system left susceptible to attacks by former employees.

In 2004, Musacchio left his position as President of Exel to form a competing company, Total Transportation Services, LP, where he was the original president and CEO.  Two other former Exel employees, Joseph Roy Brown and John Michael Kelly, also went to work at Musacchio’s new company.   According to the government, evidence submitted at trial demonstrated that between 2004 and 2006, Musacchio, Brown and Kelly engaged in a scheme to hack into Exel’s computer system for the purpose of conducting corporate espionage.  Through their repeated unauthorized accesses into Exel’s email accounts, the co-conspirators were able to obtain Exel’s confidential and proprietary business information and use it to benefit themselves and their new employer.

The criminal case against Musacchio was initiated with the indictment of Musacchio, Brown and Kelly in November of 2010.  Brown and Kelly entered guilty pleas in 2011, but have not yet been sentenced.  Following a 9-day trial in Dallas, the jury found Musacchio guilty of one felony count of conspiracy to make unauthorized access to a protected computer (hacking) and two substantive felony counts of hacking, under 18 U.S.C. §1030.

The matter had first come to light in 2006 when Exel filed a lawsuit against Total Transportation Services, including claims under the Computer Fraud and Abuse Act, the Stored Communications Act and the Texas Theft Liability Act, as well as common law claims for theft of trade secrets and tortious interference with contractual relations.  In that case, Exel alleged that Musacchio and others had systematically accessed Exel’s computer system and company e-mail accounts to obtain Exel’s trade secrets and other confidential and proprietary information in order to help establish Total Transportation Services.  Exel alleged further that the former employees used Exel passwords to hack into its computer system almost 1,200 times, accessing about 65 individual e-mail accounts.   The complaint alleged that they then used confidential company information to lure customers, employees and independent contractors to Total Transportation Services.

The Exel case also demonstrates the high price of hacking for all of those involved.  According to separate announcements by both companies, the civil case was settled in May of 2007 under terms that required Total Transportation Services to pay Exel $10 million.  The settlement also included an agreement by Total Transportation Services to pay 10 percent of its gross margin for business with Exel’s top 25 customers over 18 months, and restrict themselves from soliciting, hiring and contracting with Exel’s agents or sales agents for 20 months.

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