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Zoom Unveils Plan to Bolster Privacy Efforts After Shareholder Lawsuit Alleges Security Flaws

Zoom shares have tumbled 25% from their recent peak amid a series of high profile security failures that paralleled its surge in global popularity.

Zoom Video Communications  (ZM)  shares traded higher Wednesday after it revealed plans to beef-up its privacy initiatives following a class-action lawsuit accusing the group failing to disclose significant concerns related to its platform security.

Zoom said it has asked cybersecurity expert Alex Stamos of Stanford University -- who once lead Facebook Inc's  (FB)  security division -- to advise the group on "key initiatives", and create a CISO council and advisory board, in order to better address privacy and security challenges related to its recent surge in daily active participants.  

"Zoom has gone from being a successful mid-sized enterprise IT company to a critical part of the lives of hundreds of millions in the space of a couple of months," Stamos said in a blogpost." As someone who has walked through the galaxy of blinking lights and deafening whir of tens of thousands of servers carrying the sessions of millions of users, I appreciate the effort it takes to build a product that scales." 

"To successfully scale a video-heavy platform to such a size, with no appreciable downtime and in the space of weeks, is literally unprecedented in the history of the Internet" he added. "It has been clear to many people who have worked on production-scale systems that something special has been happening at Zoom, and the related security challenges are fascinating."

Zoom shares were marked 4% higher in early trading Wednesday to change hands at $117.34 each following the group's statement, a move that would trim the stock's two-week decline to around 25%.

Zoom's security flaws, which have come to light in recent weeks by a series of high-profile hacks -- including the disturbing racial abuse of New York Rangers prospect K'Andre Miller -- has lead to a sharp decline in the group's share price and significant investor losses.

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A suit filed late Tuesday in San Francisco by shareholder Michael Drieu, alleges that Zoom overstated its ability to protect users on the platform and failed to tell them that their communications weren't protected by end-to-end encryption. 

The U.S. Department of Homeland Security, however, said Zoom has been responsive to security concerns, according to a memo seen by the Reuters news agency, while CEO Eric Yuan has vowed to 'double down' on security measures in the highly-popular communications app.

Zoom said last month that COVID-19 had driven significant usage increases in China, its ninth-largest market, as businesses closed and factories shuttered under strict government restrictions on travel and gatherings. 

In fact, the surge in "working-for-home' from economies around the world have helped Zoom increase its daily meeting participants from around 10 million in December to more than 200 million in March.

However, as Credit Suisse analyst Brad Zelnick notes, that growth rate has increased the visibility of the group's security challenge.

"While many of these issues, especially those stemming from user error, will likely be resolved in short order, we anticipate others may linger for some time," Zelnick said. 

"Encryption concerns have already caused some high profile customers to curtail Zoom usage (demonstrating low switching costs for VC), and we expect others could follow though the majority of organizations likely have no issue," he added.