The complaint further alleges that the defendants made material misrepresentations regarding Innodata ' s actual lack of any viable AI technology , that its Goldengate AI platform was rudimentary software , and that it was not going to use AI in any significant way to gain new Silicon Valley contracts .
Crucially , D ' Agostino states that Innodata had been able to " pose as an AI company as a result of contracts with true AI companies to use its [ data solutions arm ] to outsource the labor intensive " task of using its own data to train large language models .
The complaint alleges that public perception of Innodata , and therefore Innodata ' s stock price , began to plummet when financial research firm Wolfpack Research published a report , revealing Innodata ' s misrepresentations .
" While defendants touted Innodata ' s status as an AI pioneer , other companies were only hiring Innodata for cheap labor and its operations were powered by thousands of low-wage offshore workers , not proprietary AI technology ," the complaint states .
A Preview of Future AI Washing Enforcement Actions
While the D ' Agostino complaint does not explicitly label Innodata ' s actions as AI washing , the behavior alleged is identical to what the SEC has recently cautioned against using that same phrase .
Indeed , D ' Agostino ' s allegations echo Gensler ' s admonition to regulated entities that "[ y ] ou can sell a security , you can promote an opportunity ," but that an entity also must " fairly and accurately describe the material risks " as they relate to their AI capabilities . Nevertheless , it is notable that this theory is first being tested in private litigation instead of in the form of a government enforcement action .
While legal observers may have expected the SEC to act as the vanguard of a new era of AI-related securities litigation by bringing an initial enforcement action , especially in light of the SEC ' s recent rulemaking movement [ 5 ] in that space , the regulator may want to allow private litigation to test these novel theories before wading in on its own .
Recent Comments From Regulators Underscore AI Washing Risk
Nevertheless , an enforcement action related to AI washing appears to be a question of when , not if , regulators will take that step .
To be sure , during a March 6 panel discussion at the American Bar Association ' s White Collar Crime 2024 conference in San Francisco , Gurbir S . Grewal , director of the SEC ' s Division of Enforcement , emphasized that the SEC has its eye on AI washing , once again drawing comparisons between it and so-called ESG washing .
" We saw a lot of issuers talk about their ESG practice and products , and those products didn ' t live up to what was stated ," he said , comparing the two different modes of securities law violations .
" We see advisors saying they are incorporating AI when making investment decisions for individuals when they aren ' t ," Grewal added , emphasizing that AI washing is certainly top of mind for the Enforcement Division , and also that it was a priority for its Examinations Division .
The SEC is not alone , and during the same March 6 panel discussion , Ian McGinley , the Commodity