In recent weeks, investors have brought two securities class actions against companies alleging that the companies overhyped their AI abilities. While these are not the first securities lawsuits to have been brought alleging a company overhyped its AI capabilities, the quick succession of these two cases after two years without any securities lawsuits with similar allegations may portend a larger trend.
In recent weeks, investors have brought two securities class actions against companies alleging that the companies overhyped their AI abilities.
First, on 21 February 2024, investors filed a complaint against Innodata, Inc. (“Innodata”). Innodata provides AI-enabled software platforms and managed services for data collection and annotation. The plaintiffs alleged that the company misrepresented the extent to which it actually employed AI and the investment that it had made in developing AI solutions. Based largely on a short seller report, the complaint alleged that many of the services the company claimed to provide using AI technology, it in fact performed using low-wage offshore workers. It alleged that the company spent more on marketing itself as an AI company than it did on actually developing proprietary AI tools. And it further alleged that, following the short seller report, the company’s share price dropped 30%. (The plaintiffs’ law firm’s press release can be seen here: Innodata Shareholder Lawsuit Filed By Block & Leviton – (globenewswire.com).)
Then, on 25 March 2024, investors filed a complaint against Evolv Technologies Holdings, Inc. (“Evolv”). Evolv provides AI-driven products and services that are used as an alternative to metal detectors at public schools. Beginning in November of 2022, several press articles, including a series published by the BBC, brought to light failures by Evolv’s products to detect weapons. Evolv’s products seemed especially to be vulnerable to mistaking certain knives to be cell phones. The press articles resulted in an investigation by the US Federal Trade Commission. Then, in March of 2024, investors filed a complaint accusing the company of materially overstating the efficacy of its products. (The plaintiffs law firm’s press release can be seen here: ROSEN, LEADING INVESTOR COUNSEL, Encourages Evolv (globenewswire.com).)
These are not the first securities lawsuits to have been brought alleging a company overhyped its AI capabilities. At least as far back November of 2021, investors brought a lawsuit against Zillow Group, Inc. claiming that the company had overrepresented its “Zillow Offers” tool’s ability to predict housing prices to allow consumers to more quickly buy and sell their homes. (Securities Class Action Clearinghouse: Case Page (stanford.edu)) And in May of 2022, investors brought suit against Upstart, Inc., a cloud-based lending platform. The suit alleged that the company had overstated its ability to predict interest rates and other macroeconomic trends. (Securities Class Action Clearinghouse: Case Page (stanford.edu)).
However, the quick succession of these two more recent cases, after two years without any securities lawsuits with similar allegations, may portend a larger trend. It may be especially interesting to consider these new cases in light of the Securities and Exchange Commission’s recent emphasis on AI-related enforcement. First, in December, SEC Chair Gary Gensler warned companies against “AI washing”, a term that compares the practice of overstating AI capabilities to a company’s overstating its ESG credentials, which has been called “green washing”. (SEC Chair Warns Businesses Against AI Washing: 'Don't Do It' - Law360). Then, as if to show they were serious, the SEC settled charges against two investment advisors for exactly that practice in March of 2024. (SEC.gov | SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence).
Certainly, the entire world is abuzz about AI these days. (AI investment forecast to approach $200 billion globally by 2025 (goldmansachs.com)). And history suggests that where there is excitement, there is hype. That AI will be a game changer for all of us seems to many to be a certainty. Nearly as certain is that those without true AI capabilities will represent that they have them in spades in order to attract unwitting capital, and securities litigation in this area will be ramping up in the coming months and years.
