By: Sam Schroeder
As you can probably see from the litany of AI-related advertisements and marketing pieces, the biggest trend in the business world is integrating AI into firms and promoting that integration as a driver of growth and record profits. This practice, dubbed “AI-washing”, raises major securities fraud concerns, as firms make sweeping claims about their AI capabilities to investors in prospectuses and earnings calls.[1]
The SEC has shown that it views AI claims as a species of investor deception.[2] In 2024, the SEC charged two firms with making false statements claiming they use artificial intelligence to provide investment forecasts for clients, when in fact the firms “did not in fact have the AI and machine learning capabilities that it claimed.”[3] When advertising copy moves into prospectuses and earnings calls, firms open themselves up to enforcement actions by the SEC or private Rule 10b-5 class action lawsuits.[4]
“AI-washing” litigation depends on the materiality of the deception.[5] A statement or omission is materially misleading if there is a “substantial likelihood that a reasonable shareholder would consider it important in deciding how to [act].”[6] Of particular concern are companies that engage in half-truths that omit important contextual information.[7] For example, one such company claimed that an AI would make them a market leader, when in reality, the technology either did not exist or did not function effectively.[8] In another example, an executive claimed that AI technology automated purchases, when in reality, contract employees manually entered orders.[9] When companies claim that AI has improved their core operations, they make a representation to investors that must be substantiated.[10]
Firms argue that many of their AI-related claims are mere “corporate puffery”.[11] Puffery is when firms make such broad and generalized claims that no reasonable investor could rely on.[12] When firms make determinate verifiable statements about their AI, these claims no longer resemble puffery and instead function as substantiated claims about corporate capabilities.[13] Firms will often try to avoid liability through opinion statements as well. These opinions are not perfect safe harbors and can still be actionable when they contain embedded statements of fact.[14] The use of the words “we think” or “we believe” does not automatically qualify for safe harbor and should not be relied upon as a skeleton key fix for AI disclosures.[15]
“AI-washing” is not a particularly new concept in securities fraud enforcement and follows a pattern like ESGs “greenwashing”.[16] With increased attention on environmental impact, firms began making claims about environmental initiatives that may have been misleading to investors. As a result, the SEC created an ESG Task Force in 2021 specifically to chase firms’ misstatements regarding climate issues.[17] In 2025, the SEC created an Emerging Technologies Task Force dedicated to AI-washing misstatements.[18] Whether it’s AI or ESG, the message the SEC is sending is clear: theme-based trend marketing claims to investors must be substantiated when tied to a firm’s core operations.
Though the easy answer for firms looking to avoid risk is to simply not speak on AI to investors, the current capital markets landscape is obsessed with AI opportunities.[19] The proper fix for this issue is to ensure your firm has proper internal compliance controls that can validate and substantiate any AI-related claims going out to investors. Making sure that executives are making validated AI statements instead of marketing copy on earnings calls should be a top priority to avoid liability.
[1] See Gary Gensler, Chair, U.S. Sec. and Exch. Comm’n, AI, Finance, Movies, and the Law – Prepared Remarks Before the Yale Law School (Feb. 13, 2024), https://www.sec.gov/newsroom/speeches-statements/gensler-ai-021324 [https://perma.cc/39CM-BP82].
[2] See Press Release, U.S. Sec. and Exch. Comm’n, SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence (Mar. 18, 2024), https://www.sec.gov/newsroom/press-releases/2024-36 [https://perma.cc/YV2G-AEEW].
[3] Id.
[4] See James Christie & Nick Manningham, The Rising Tide of AI-Washing Cases in Securities Fraud Litigation, Corp. Compliance Insights (Feb. 24, 2026), https://www.corporatecomplianceinsights.com/rising-tide-ai-washing-cases-securities-litigation/ [https://perma.cc/E4VU-XRBE].
[5] See Gensler, supra note 1 (“Companies should ask themselves some basic questions, such as: ‘If we are discussing AI in earnings calls or having extensive discussions with the board, is it potentially material?’”).
[6] See TSC Indus. v. Northway, 426 U.S. 438, 449 (1976).
[7] See Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. 257, 264 (2024) (ruling that pure omissions are not actionable under Rule 10b-5, only affirmative statements such as half-truths.).
[8] Nabil Helo v. Sema4 Holdings Corp., 3:22-CV-01131, 2025 U.S. Dist. LEXIS 119018, at *17 (D. Conn. June 23, 2025).
[9] See Press Release, U.S. Sec. and Exch. Comm’n, SEC Charges Founder and Former CEO of Artificial Intelligence Startup with Misleading Investors (Apr. 11, 2025), https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26282 [https://perma.cc/6A7B-4DZS].
[10] See Gurbir S. Grewal, Dir., Div. of Enf’t, U.S. Sec. and Exch. Comm’n, Remarks at Program on Corporate Compliance and Enforcement Spring Conference 2024 (April 15, 2024), https://www.sec.gov/newsroom/speeches-statements/gurbir-remarks-pcce-041524 [https://perma.cc/N52T-SWTM].
[11] See, e.g., Nabil Helo, 2025 U.S. Dist. LEXIS 119018, at *21–22.
[12] See In re K-Tel Int’l Sec. Litig., 300 F.3d 881, 897 (8th Cir. 2002) (“Immaterial statements include vague, soft, puffing statements or obvious hyperbole.”).
[13] See In re Upstart Holdings, Inc. Sec. Litig., 2:22-cv-02935, 2023 U.S. Dist. LEXIS 175451, at *37–38 (S.D. Ohio, Sep. 29, 2023).
[14] See id. at *41–42.
[15] Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175, 193 (2015).
[16] See Joseph Orr, ESG Greenwashing and the SEC Whistleblower Program, Kohn, Kohn & Colapinto LLP (May 14, 2025), https://kkc.com/frequently-asked-questions/esg-greenwashing-sec-whistleblower-program/#Exaggerated_or_False_Claims [https://perma.cc/6L6S-VMXD].
[17] See Press Release, U.S. Sec. and Exch. Comm’n, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (Mar. 4, 2021), https://www.sec.gov/newsroom/press-releases/2021-42 [https://perma.cc/7SNX-CAC2] (announcing the greenwashing task force focused on “identify[ing] any material gaps or misstatements in issuers’ disclosures of climate risks under existing rules”).
[18] See Press Release, U.S. Sec. and Exch. Comm’n, SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors (Feb. 20, 2025), https://www.sec.gov/newsroom/press-releases/2025-42 [https://perma.cc/5ERZ-5T3W].
[19] See Matthew Bultman, AI Disclosures to SEC Jump as Agency Warns of Misleading Claims, Bloomberg L. (Feb. 8, 2024, at 05:00 ET), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/BNA%200000018d-5719-dcd0-a7ff-7ffd0d280001 [https://perma.cc/77QA-FQNC].
