A key part of the job for whistleblower lawyers and government enforcers is fitting new facts to existing precedent.  Despite fraudsters deploying what appear to be new and innovative ways to illicitly obtain government or investor funds, the crux of the scheme is often the same decade after decade.  As the famous Yogi-ism goes, “It’s déjà vu all over again.”

Take “AI washing,” for instance.  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 is.  The SEC’s Former Director of the Division of Enforcement, Gurbir Grewal, warned against the practice this way: “If you are rushing to make claims about using AI … to capitalize on growing investor interest, stop.  Take a step back, and ask yourselves: do these representations accurately reflect what we are doing or are they simply aspirational?  If it’s the latter, your actions may constitute the type of ‘AI-washing’ that violates the federal securities laws.  The bottom line: you must ensure that your representations regarding your use of AI are not materially false or misleading.”

In 2024, the SEC brought a number of AI washing actions.  For example, the SEC settled charges against an investment advisory company that allegedly claimed “its technology incorporated ‘[e]xpert AI-driven forecasts,’ when in fact it did not.”  In another example, the SEC settled charges against a company that allegedly “represented that it used artificial intelligence and machine learning to analyze its retail clients’ spending and social media data to inform its investment advice when, in fact, no such data was being used in its investment process.”

The DOJ has brought criminal cases alleging AI washing as well.  Just last week, Theodore Farnsworth, the former Chairman and CEO of the parent company of MoviePass, pleaded guilty to charges of defrauding and conspiring to defraud investors related to, among other things, claims about the use of AI.  According to the DOJ, Mr. Farnsworth “falsely claimed that [the company] possessed and used technologies – such as ‘big data’ and ‘artificial intelligence’ capabilities – to generate revenue by analyzing and monetizing the data MoviePass collected from subscribers.  But Farnsworth knew [the company] did not possess these capabilities to monetize MoviePass’ subscriber data and had incorporated any such technologies into the MoviePass application.”

AI washing is certainly a recent enforcement trend.  It’s also déjà vu all over again.  Consider “Greenwashing,” another form of investor fraud that the government has targeted in recent years.  Greenwashing refers to an individual or company defrauding investors with a material lie about the sustainability or environmental impact of products or practices to try to make the company seem better than it is.  One recent case we analyzed involved the SEC charging Keurig Dr Pepper Inc. for making inaccurate statements in its annual reports regarding the “recyclability of its K-Cup single use beverage pods.”

With both types of “washing” schemes, the crux of the alleged claim is the same: an individual or a company defrauded investors with a material lie about the company’s business or practices to make the company seem better than it is.  That can form the basis of an enforcement action or whistleblower complaint whether the lie relates to AI, machine learning, the environment, or whatever else may be the business initiative of the moment.  As fraudsters find new and innovative ways to defraud investors, it’s important that Government enforcers and whistleblowers remain ready to fit the new facts to precedent and see “déjà vu all over again” in order to stop unscrupulous actors and protect investors from being swindled.  Indeed, the SEC Whistleblower Program encourages whistleblowers to come forward by providing monetary awards to eligible whistleblowers who provide information about violations of U.S. securities laws.

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 or a Greenwashing scheme, please do not hesitate to contact us for a free and confidential consultation.

Read Is “AI Washing” the New “Greenwashing”? Government Enforcers Crack Down on New(ish) Ways of Defrauding Investors at constantinecannon.com