In a speech last December, as well as in several subsequent statements, SEC Chair Gary Gensler has emphasized the agency’s concerns with companies that are over-hyping their artificial intelligence (AI) capabilities in ways that mislead investors. In March, the agency filed enforcement actions against two investment advisors that allegedly misled investors about the firms’ AI-enabled services.

In the latest example of the agency’s AI-related campaign, earlier this week the agency filed an enforcement action against the CEO and Founder of Joonko Diversity, Inc., an Artificial Intelligence-based employee recruitment startup, alleging among other things that the individual made false AI-related claims about the company’s services. In bringing the action, the agency emphasized the significance of the action’s AI-related allegations. A copy of the agency’s June 11, 2024, press release about the action can be found here. The agency’s complaint in the action can be found here.


Ilit Raz was the founder and CEO of Joonko. Raz allegedly marketed the company as a technology firm that used AI to match its customer firms with diverse job applicants, in order to assist the client firms to meet their diversity, equity, and inclusion (DEI) goals. Raz allegedly misrepresented that Joonko had hundreds of paying customers, including Fortune 500 firms, and that thousands of job applicants were using its platform.

In fact, the SEC alleges, Raz’s representations about Joonko were false and misleading. The platform, the SEC alleges, did not function as Raz represented, Joonko had at most dozens, not hundreds, of paying customers, and it lacked any business relationship with a Fortune 500 company. Only a small number of applicants were using the platform to seek employment. The company also allegedly fabricated supposed employment contracts, financial statements, and other documents to support the fraud. Raz allegedly used these various representations and documents to raise $21 million in equity investments from at least 27 investors.

In June 2023, the company’s board of directors became concerned about Raz’s representations and began to investigate. When confronted, Raz admitted to certain falsehoods. After the misrepresentations came to light, Raz wound down the company’s business operations. After some investors demanded the return of their investments, Joonko filed for bankruptcy.

In its complaint against Raz, the SEC seeks permanent injunction, civil money penalties, disgorgement with prejudgment interest, and an officer-and-director bar against Raz.

In a parallel action on the same day as the SEC complaint, the U.S. attorney for the Southern District of New York filed a criminal securities fraud action in the Southern District of New York against Raz, as reflected in the office’s June 11, 2024 press release, here.

In the press release accompanying the complaint’s filing, the agency emphasized the significance to the agency of Raz’s AI-related misrepresentations. The press release quotes Gerbir Grewal, the SEC’s Enforcement Division head, as saying ““We allege that Raz engaged in an old school fraud using new school buzzwords like ‘artificial intelligence’ and ‘automation,’ … As more and more people seek out AI-related investment opportunities, we will continue to police the markets against AI-washing and the type of misconduct alleged in today’s complaint. But at the same time, it is critical for investors to beware of companies exploiting the fanfare around artificial intelligence to raise funds.”


The SEC has made it clear that it is concerned about investors being mislead by company’s AI-related claims. This action is the latest example of the agency’s focus on AI-related misrepresentations. In the current environment, where investors are eager to capitalize on the new technological capabilities that AI promises, the agency is concerned that companies will seek to mislead investors by using “AI buzzwords” to attract investor attention – what Gensler has called AI-washing.

There are several points about these circumstances that bear emphasizing. The first is that the enforcement action was accompanied by a parallel criminal complaint. The action of the U.S. attorney in bringing the criminal action underscores the potential risks involved for companies that engage in AI-washing. As far as I am aware, the criminal complaint is the first AI-related criminal prosecution.

Another thing that readers will want to note is that Joonko was a private company, yet its CEO is the subject of a SEC enforcement action alleging violations of the federal securities laws. It is not news that the federal securities laws apply to private companies, but from time to time it is worth re-iterating that the U.S. securities laws do not just apply to publicly traded companies.

One other note about this latest action is that while the SEC has now brought several AI-related enforcement actions, the SEC has still not yet brought an AI-related action against a listed company. Although at this point we can only speculate, I suspect that it is only a matter of time before the agency targets a listed company in an AI-related action.

It is also probably worth also noting that in many ways these circumstances represent what Grewal called an “old school fraud.” The company touted its AI capabilities but also engaged in a variety of other misleading representations. In truth, these circumstances only partially (at marginally, at that) involve AI-related considerations. Yet the AI connection is that aspect of the case that both the SEC and the U.S. Attorney both sought to emphasize in their respective press releases. Clearly both the agency and the U.S. Attorney wanted to communicate a message about the case’s AI connection. They want everyone to know that they are focused on AI-related misrepresentations.

I suspect that before all is said and done, we are going to see a lot of action, both from regulatory agencies and from investors, involving allegations of AI-related misrepresentations.