As artificial intelligence (AI) continues to dominate headlines, become integrated into more technology products, and attract massive amounts of new capital, claims of "AI washing" brought by the Securities and Exchange Commission (SEC) and private plaintiffs will almost certainly become more prevalent. Similar to "greenwashing," where companies make false or misleading claims about the environmental benefits of their products or practices, AI washing involves making exaggerated or untrue statements about a company's AI capabilities to attract investors and customers. The SEC has recently issued settled enforcement actions against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their use of AI.

Delphia (USA) Inc.

According to the SEC's Order Instituting Administrative and Cease-and-Desist Proceedings in the Matter of Delphia (USA) Inc. (the Delphia Order), from 2019 to 2023, Delphia, a Toronto-based firm, made false and misleading statements in its SEC filings, press releases, and website regarding its purported use of AI and machine learning that incorporated client data in its investment process. According to the Delphia Order, Delphia claimed that it “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” However, the SEC found that these statements were false and misleading because Delphia did not actually possess the AI and machine learning capabilities that it claimed to possess. Additionally, the firm was charged with violating the SEC’s Marketing Rule, which prohibits registered investment advisers from disseminating advertisements that include untrue statements of material fact.

Global Predictions Inc.

The SEC, in the Order Instituting Administrative and Cease-and-Desist Proceedings in the Matter of Global Predictions, Inc. (the Global Predictions Order), found that Global Predictions, a San Francisco-based firm, made false and misleading claims in 2023 on its website and social media about its use of AI. According to the SEC, the firm falsely claimed to be the "first regulated AI financial advisor" and misrepresented that its platform provided "[e]xpert AI-driven forecasts." Global Predictions also violated the Marketing Rule by falsely claiming that it offered tax-loss harvesting services and including an impermissible liability hedge clause (a type of clause that, generally, allows a party to limit their potential exposure to liabilities and losses) in its advisory contract, among other securities law violations.

Without admitting or denying the SEC’s allegations, both Delphia and Global Predictions consented to entry of the Delphia Order and the Global Predictions Order, respectively, finding that they violated the Investment Advisers Act and ordering them to be censured and imposing a cease-and-desist order from violating the charged provisions. Delphia agreed to pay a civil penalty of $225,000 and Global Predictions agreed to pay a civil penalty of $175,000.

Potential Causes of Action for Private Plaintiffs

In addition to SEC enforcement actions, companies engaging in AI washing should also be concerned about potential private lawsuits brought by investors or consumers. Private plaintiffs may seek to bring claims under various federal and state laws, including:

A. Securities Claims

Securities Act of 1933: Plaintiffs could bring claims under Sections 11, 12(a)(2), and 15 for material misstatements or omissions in registration statements, prospectuses, or oral communications related to public offerings.
Securities Exchange Act: Plaintiffs may bring claims under Sections 10(b), 14(a), 14(e), 18, and 20(a) for false or misleading statements in various contexts, including in connection with the purchase or sale of securities, proxy statements, and tender offers.

B. State Law Claims

Breach of fiduciary duty: Plaintiffs could bring direct or derivative claims under Delaware or California law, arguing that misstatements concerning AI capabilities exposed the company to liability.
California Corporations Code violations: Plaintiffs could bring claims under various sections of the California Corporations Code based on allegations of materially misleading statements.

C. Advertising and Consumer Protection Claims

California laws: Claims could be brought under the California Unfair Competition Law, False Advertising Law, and Consumers Legal Remedies Act.
New York law: New York's General Business Law §§ 349-50 prohibits deceptive acts or practices and false advertising in the conduct of business.

These private causes of action underscore the importance of ensuring accuracy and transparency in AI-related claims, as companies may face significant legal risks beyond SEC enforcement actions.

Conclusion

The rise of AI washing claims poses risks to companies. As the SEC's recent enforcement actions against Delphia and Global Predictions demonstrate, regulators are taking a proactive approach to combat false and misleading claims about AI capabilities. Companies that engage in AI washing not only face potential SEC penalties but also may expose themselves to private lawsuits from investors and consumers under a range of federal and state laws.

To avoid the consequences of AI washing, companies should prioritize accuracy and transparency in their AI-related claims. This requires a commitment to truthful and precise communication, robust internal controls and oversight, and staying informed about regulatory developments and best practices. By adopting these measures, companies can harness the power of AI while maintaining the trust and confidence of their stakeholders.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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