AI is transforming financial markets, but with innovation comes risk. Labaton’s latest article, authored by Carol Villegas and David Saldamando and published in FT Adviser, explores the rise of “AI-washing” and its legal consequences.  Recent U.S. court decisions show that misleading statements about AI are not just bad business—they can constitute actionable securities fraud. Investors worldwide, including those in the UK and Europe, can hold companies accountable in U.S. courts. Learn more about the evolving legal landscape and what it means for institutional investors.

As AI technology continues to energize financial markets, the risk of misleading institutional investors has grown, and so too has the number of securities fraud class actions involving AI-washing claims.  Recent years have seen a significant uptick in these lawsuits, with courts recognizing that a company’s statements about its AI technology can be material to investors.

In several notable cases, courts have allowed claims to proceed where companies made specific, objectively verifiable statements about their AI capabilities that turned out to be false or misleading.  For example, in Helo vs Sema4 Holdings Corp, the court found that statements about a “proprietary health intelligence platform” using “state-of-the-art AI” were actionable when the platform did not exist or lacked the claimed abilities. Similarly, in cases against GigaCloud Technology, Upstart Holdings, and Zillow Group, courts found that misleading statements about AI use and performance could form the basis for securities fraud claims.

These decisions underscore that when public companies overstate or misrepresent their AI capabilities, and those statements are specific and verifiable, they face strong and viable securities fraud claims. The U.S. Securities and Exchange Commission (SEC) has also made clear that prosecuting AI-washing is an enforcement priority.  The SEC’s cyber security and emerging technologies unit has publicly committed to rooting out AI-related fraud, and current leadership has emphasized that existing principles-based rules are designed to ensure companies disclose material impacts of new developments, including AI.