TheCorporateCounsel.net

Earlier this year – which already feels like a lifetime ago – I blogged about an enforcement action that alleged a public company had overstated its “artificial intelligence” capabilities. Although it appears a lot has changed in terms of the SEC enforcement environment, it’s still important for AI-related disclosures to be carefully reviewed for accuracy – for two reasons.

First, securities regulations do still exist. It’s too early to tell whether enforcement activity will in fact dwindle to record lows, and even if it does, you’ll have to contend with a statute of limitations that may extend into an administration with different priorities. Second, and arguably more relevant right now, class action lawsuits aren’t going away. This blog from Kevin LaCroix at the D&O Diary says that there were 15 AI-related securities suits filed in 2024 – and four so far this year. The blog summarizes the two latest actions – which were both filed earlier this month and relate to statements made in 2023-2025. Kevin notes:

Over the last couple of years, investors have shown a willingness to pay a premium for the shares of companies that appear positioned to capitalize on rise of AI. The share prices of AI-connected companies have (at least until recently) soared. These financial market features create incentives for companies to try to portray themselves as poised to capitalize on the advent of AI. However, when projected AI benefits fail to materialize, company share prices decline, investors are disappointed, and, as these two new lawsuits demonstrate, securities class action lawsuits can follow.

In both of these new lawsuits, the defendant companies allegedly attempted to project themselves as being in a position to benefit from the rise of AI, allegedly setting investors up for later disappointment when reality fell short. The shareholder plaintiffs in both of these actions allege that the companies overstated their AI capabilities or prospects, in a demonstration of what has been called “AI-washing.”

These (lightly edited) excerpts from Kevin’s blog give more color on the statements underlying the plaintiffs’ claims:

The first securities lawsuit alleges that during from May 2023 to February 25, 2025, the Company, in order to project financial growth and stability, made statements to investors concerning its launch of its digital ad platform and its use of “cutting-edge AI technologies” to match advertisements to mobile games and to allow its customers to expand into web-based marketing and e-commerce support financial growth. Throughout the period, the company reported impressive financial results, outlooks, and guidance.
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The complaint alleges that during the class period the defendants “continually touted the new and improved ad platform and cutting-edge AI technologies as the main reason why the Company has seen exponential growth since 2022. In actuality, the Company used manipulative practices that forced unwanted apps on customers via a ‘backdoor installation scheme’ in order to erroneously inflate installation numbers, and in turn, profit numbers.”

And for the second complaint:

According to the subsequently filed securities complaint, during the period July 2024 to February 5, 2025, the Company projected favorable growth in its smartphone segment and for the Company as a whole, among other things, saying that it expected that the rise of AI would “ignite a transformative smartphone upgrade cycle,” and that the Company was in the early stages of this “multi-year trend,” and that the Company was “well-positioned to capitalize on it.”

However, on February 5, 2025, the Company reported disappointing results for its fiscal first quarter and lowered its guidance for the second quarter, citing a “competitive landscape” that had “intensified.” According to the securities complaint, the Company’s share price declined 24% on this news.
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The complaint alleges that the during the class period, the defendants made misrepresentations or failed to disclose that “its long-standing relationship with Apple, its largest customer, did not guarantee that Apple would maintain its business with the Company for its anticipated iPhone launch. Additionally, Defendants oversold the Company’s position and ability to capitalize on AI in the smartphone upgrade cycle.” The complaint alleges that the Company’s statements “absent these material facts” caused investors to purchase the company’s securities at “artificially inflated prices.”

As you can see, when it comes to AI-related opportunities, “anything you say can and will be held against you.” Business folks are understandably excited to talk about this stuff, which is all the more reason for securities counsel to pressure-test these disclosures before they’re publicly released.

– Liz Dunshee