Over the last several months, various SEC spokespeople, including SEC Chair Gary Gensler, have issued strong precautionary statements against so-called “AI-washing,” which Microsoft Co-Pilot, an AI-powered tool, defines as a “deceptive marketing tactic where a product or service is promoted by exaggerating or falsely claiming the use of artificial intelligence.” The SEC has even issued an advisory warning investors against exaggerated or fraudulent AI-related claims. In several prior enforcement actions, the SEC has made it clear that it is prepared to pursue those whom it deems to have engaged in AI-washing.
In the latest example of the SEC’s AI-washing focused enforcement activity, late last week the SEC announced that it had entered settled charges against an investment advisor, its principals, and related entities, alleging that the parties engaged in misrepresentations concerning the firms’ alleged used of AI to perform automated trading in clients’ accounts. The SEC’s October 10, 2024, press release regarding the action against Rimar Capital USA and related entities and individuals can be found here. The SEC’s October 10, 2024, administrative order in the matter can be found here.
Rimar LLC is an investment advisor. Rimar Capital USA is a related entity. Itai Liptz is CEO of Rimar and Rimar USA. Clifford Boro is a board member of Rimar Capital USA. The SEC alleges that between May 2022 and April 2023, the parties raised nearly $4 million from 45 investors for the development of Rimar. The SEC alleges that the parties raised the funds using false or misleading statements that the firms “use artificial intelligence to perform automated trading for advisory client accounts in a range of products including equities, futures, and crypto assets.” The firms allegedly used these same representations to gain advisory clients as well. The SEC alleges that Liptz either knew or was reckless in not knowing that the representations were false. The SEC alleges that Boro should have known that the representations were misstatement if had exercised reasonable care as a board member.
Without admitting or denying the SEC’s charges, the entities agreed to a cease-and-desist order against them, as well as against Liptz and Boro. Liptz was ordered to pay disgorgement and interest totally approximately $213,000 and a civil money penalty of $250,000 and Boro was ordered to pay a civil money penalty of $60,000.
The SEC’s press release quotes an agency spokesperson as saying that “Through entities he controlled, Liptz lured investors and clients with multiple fabrications, including with buzzwords about the latest AI technology,” adding that “As AI becomes more popular in the investing space, we will continue to be vigilant and pursue those who lie about their firms’ technological capabilities and engage in ‘AI washing’.”
Discussion
In many ways, this enforcement action is not a surprise. I think we are all aware of the hype surrounding AI. Given the excitement in the investment markets over AI and what the SEC spokesperson called the AI buzzwords, it is almost inevitable that attention-seeking participants in the financial marketplace might seek to assert, and perhaps even overstate, their AI credentials. As I have noted in prior posts, there have already been a number of SEC AI-Washing related enforcement actions (most recently here) and AI-related securities class action lawsuits (most recently here).
Because of all of the noise surrounding AI; because of the extent to which the securities markets have been influenced by AI-related hype; and indeed because of the extent to which a lot of the assertions about the capabilities of artificial intelligence seem to be seriously overblown, it seems likely to me that there will be more AI-related enforcement actions and securities lawsuits filed as the year progresses. Indeed, I strongly believe that the number of AI-related securities suit filings will prove to be a significant factor in the overall number of securities class action lawsuit filings during the year.
One final observation about likely AI-related actions is that, so far at least, most of the AI-related activity has focused on companies’ exaggerated claims regarding the AI capabilities. One related area of concern that should not be overlooked is the possibility of claims against companies for failing to disclose their AI-related risks, such as, for example, with respect to privacy or intellectual property issues, or even with respect to operational and financial issues. I believe that as the AI related claims unfold, the kinds of claims alleged likely will evolve, and likely will include disclosure allegations related to AI risks, as well as with respect to AI capabilities.