Understanding AI Washing: Key Information for Investors

willingness to permit AI-washing securities claims to proceed past the motion to dismiss stage, giving investors meaningful legal recourse against these fraudulent practices. This confirms that false or exaggerated statements about a company’s AI technology can form the basis of a securities fraud claim, especially when those statements are specific and verifiable.

Carol and David cite specific cases, such as Jaeger v. Zillow Grp., Inc and In re Upstart Holdings, Inc. Securities Litigation, to highlight how courts have ruled that misstatements regarding AI capabilities are material. In Jaeger v. Zillow Grp., Inc., the court found that Zillow misrepresented its use of automated pricing algorithms. In In re Upstart Holdings, Inc. Securities Litigation, the courts determined that statements about Upstart’s AI-driven underwriting platform falsely claimed a significant advantage, supporting the plaintiff’s AI-washing claims.

Former employees often play a crucial role in supporting AI-washing claims, as seen in cases like In re GigaCloud Tech. Inc. Securities Litigation and Helo v. Sema4 Holdings Corporation. Testimony from former employees revealed discrepancies between companies’ AI claims and actual practices, bolstering investor allegations of misleading information. Furthermore, executives’ assertions of AI proficiency have also led to securities fraud claims, such as in Genesee Cnty. Employees’ Retirement System v. DocGo Inc., where a CEO misrepresented his AI expertise based on a degree he did not actually possess.

In addition to private securities actions, Carol and David discuss the regulatory response to AI-washing. They mention the SEC’s focus on accurate AI-related disclosures and enforcement actions against companies making misleading claims about their AI technology. Settlements, cease and desist orders, and criminal charges have been issued against companies like Delphia Inc., Global Predictions Inc., Presto Automation Inc., and Saniger/Nate Inc. as a result of false AI claims, signaling the seriousness of AI-washing in the eyes of regulators.

Conclusively, Carol and David stress that companies risk severe securities liability by overstating or fabricating their AI capabilities. The response from both courts and regulators to combat AI-washing emphasizes the importance of transparency in AI disclosures. Overall, navigating the landscape of AI investments requires careful scrutiny and due diligence to avoid the pitfalls associated with AI-washing practices.