USA – CALIFORNIA Trends and Developments Contributed by: Bahram Seyedin-Noor, Jared Kopel, Joshua Korr and Monica Eno, Alto Litigation
seded by the SEC rules should they survive judicial review. Unless and until that happens, however, they likely would give investor plaintiffs fodder for new disclosure claims. AI washing leads to securities claims On 25 January 2024, the SEC issued an “Arti- ficial Intelligence (AI) and Investment Fraud: Investor Alert” to make investors aware of the increase of investment frauds involving the use of AI. Indicative of their heightened alertness for scams involving AI claims, on 18 March 2024, the SEC announced they had settled enforce- ment actions against two investment advisers – Delphia (USA) Inc (“Delphia”) and Global Pre- dictions Inc (“Global Productions”) – for making false and misleading statements about their use of AI. This practice is often referred to as “AI washing”. According to the SEC’s Order Instituting Admin- istrative and Cease-and-Desist Proceedings in the Matter of Delphia (USA) Inc (the “Delphia Order”), from 2019 to 2023, Toronto-based firm Delphia 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 (Order, In the Matter of Del- phia (USA) Inc, Admin Proc File No 3-21894). The SEC took issue with Delphia’s statement 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”. 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 Market- ing Rule, which prohibits registered investment
advisers from disseminating advertisements that include untrue statements of material fact. The SEC, in the Order Instituting Administra- tive and Cease-and-Desist Proceedings in the Matter of Global Predictions, Inc (the “Global Predictions Order”), found that San Francisco- based firm Global Predictions made false and misleading claims in 2023 on its website and social media about its use of AI (Order, In the Matter of Global Predictions, Inc, Admin Proc No 3-21895). According to the SEC, the firm falsely claimed to be the “first regulated AI financial advis[e]r” 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 alle- gations, 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 impos- ing a cease-and-desist order from violating the charged provisions. Delphia agreed to pay a civil penalty of USD225,000 and Global Predictions agreed to pay a civil penalty of USD175,000. On 11 June 2024, the SEC announced it had charged Ilit Raz – the CEO and founder of the AI recruitment start-up Joonko Diversity Inc (“Joonko”) – with defrauding investors of at least USD21 million by making false and mis- leading statements about the company’s use of AI (Complaint, Sec Exch Comm’n v Raz, No 1:24-CV-04466, 4–5).The SEC’s complaint alleg-
1477 CHAMBERS.COM
Powered by FlippingBook