Last month, Mina Tadrus, founder and operator of the hedge fund Tadrus Capital LLC, pled guilty to investment adviser fraud in connection with a scheme to defraud Tadrus Capital’s clients and investors of over $5 million.

According to the government, “Tadrus marketed interests in Tadrus Capital LLC to investors based on false promises that he would employ artificial intelligence-driven trading strategies that would earn them guaranteed annual returns of 30% or more.  In reality, however, Tadrus did not use investor funds to engage in artificial intelligence-based trading as promised . . . .  Instead, he used investor funds to pay employees, to purchase luxury gifts and expensive meals for himself, and to make Ponzi scheme-like payments to . . . victim investors.”  These false promises about using AI strategies to earn substantial guaranteed returns for investors landed Tardus in trouble. At sentencing, he faces up to five years in prison, according to the DOJ.

John J. Durham, the U.S. Attorney for the Eastern District of New York, stated: “The defendant preyed on the Egyptian-American Coptic Christian community by falsely promising that his purported artificial intelligence-driven hedge fund would earn guaranteed annual returns of 30% or more, and taking advantage of their trust for his own personal gain.”  Mr. Durham reiterated that his office “has prioritized protecting and seeking justice for individual investors in [the Eastern District of New York] and beyond.”

Recently, Constantine Cannon analyzed the concerning rise of AI washing schemes and associated enforcement actions.  AI washing refers to an individual or company defrauding investors with a material lie about the company’s use of artificial intelligence or machine learning to try to make the company seem better than it really is.  AI washing can form the basis for a government enforcement action or a submission under the SEC’s Whistleblower Program.

Constantine Cannon partner Dan Vitelli commented: “The SEC and DOJ are cracking down on AI washing.  We are seeing this more and more.  This isn’t the first or the last time we will hear about this type of enforcement action.  As more individuals and companies make material misrepresentations to investors about their use and implementation of AI, increased enforcement in this area will likely follow.”

The SEC Whistleblower Program offers incentives for reporting violations, where individuals can receive up to 30% of the monetary sanctions collected in actions brought by the government. If you would like to speak to a member of the Constantine Cannon whistleblower lawyer team to learn more about the SEC Whistleblower Program, or if you believe you may have evidence of an AI washing scheme, please contact us for a free and confidential consultation.

Read Founder of Tadrus Capital, a Supposedly AI-Driven Hedge Fund, Pleads Guilty at constantinecannon.com