In December 2023, we published an alert concerning US Securities and Exchange Commission ("SEC") Chair Gary Gensler's warning to public companies against "AI washing" – that is, making unfounded claims regarding artificial intelligence ("AI") capabilities.1 It is no surprise that since then regulators and the US Department of Justice ("DOJ") have repeated this threat and the SEC publicized an AI related enforcement action that typically would not get such emphasis.
In January 2024, the SEC's Office of Investor Education and Advocacy issued a joint alert with the North American Securities Administrators Association and the Financial Industry Regulatory Authority warning investors of an increase in investment frauds involving the purported use of AI and other emerging technologies.2 Similarly, the Commodity Futures Trading Commission Office of Customer Education and Outreach issued a customer advisory warning the public against investing in schemes touting "AI-created algorithms" that promise guaranteed or unreasonably high returns.3
Then on February 2, 2024, the SEC issued a press release that included quotes from the Director of the Division of Enforcement ("Enforcement Director") for what, absent the misleading statements regarding AI, would typically be an insignificant offering fraud settlement.4 The SEC complaint featured in the press release named Brian Sewell, the founder of online crypto trading course American Bitcoin Academy, and his company, Rockwell Capital Management (collectively the "Defendants"). The SEC alleged that Sewell convinced his students to invest in a prospective hedge fund by misrepresenting that the fund would use "preemptive intelligence on moves in cryptocurrency," including AI, to generate significant returns for investors. Sewell allegedly received $1.2 million from 15 students and held the money in bitcoin, which eventually was stolen when his digital wallet was hacked. Sewell's hedge fund never materialized.
The Defendants agreed to settle the fraud charges without admitting or denying the allegations in the complaint. As part of the settlement, which is pending court approval, Rockwell Capital Management agreed to pay disgorgement and prejudgment interest in the amount of $1,602,089 and Sewell agreed to a civil penalty of $223,229.
In announcing the settlement, the Enforcement Director issued a warning to other companies: "Whether it's AI, crypto, DeFi or some other buzzword, the SEC will continue to hold accountable those who claim to use attention-grabbing technologies to attract and defraud investors."
Finally, on February 14, 2024, the DOJ also turned its attention to AI, with Deputy Attorney General Lisa Monaco stating that AI may be the "sharpest blade yet" in the long history of technology as a double-edged sword. She warned that "[g]oing forward, where Department of Justice prosecutors can seek stiffer sentences for offenses made significantly more dangerous by the misuse of AI, they will."5
However, given that regulatory bodies are in the early stages of investigating, prosecuting and regulating the misuse of AI, the nature and extent of those penalties remain to be seen. In light of increased regulatory activity surrounding AI, companies should ensure that they are accurately representing their AI capabilities and the role of AI in their businesses.
White & Case's Global Technology Industry Group6 draws from various disciplines and a broad range of expertise to help clients contextualize statements regarding AI capabilities to avoid such regulatory scrutiny. Should enforcement and regulatory queries arise, the Firm's White Collar/Investigations Practice has practical and current experience managing such inquiries on clients' uses of AI.
1 Navigating New Frontiers in Regulatory Enforcement: the SEC Increases Scrutiny of Artificial Intelligence | White & Case LLP (whitecase.com)
2 Artificial Intelligence (AI) and Investment Fraud: Investor Alert | Investor.gov.
3 CFTC Customer Advisory Cautions the Public to Beware of Artificial Intelligence Scams | CFTC
4 SEC.gov | SEC Charges Founder of American Bitcoin Academy Online Crypto Course with Fraud Targeting Students.
5 Criminals Who Misuse AI Face Stiffer Sentences in DOJ Crackdown (bloomberglaw.com)
6 Technology | White & Case LLP (whitecase.com)
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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