In the burgeoning landscape of artificial intelligence (AI) and its integration into corporate operations, the intersection of AI advancements and securities law has emerged as a critical focal point for legal scrutiny. A recent lawsuit filed against Innodata, a software-based data management company, underscores those evolving legal challenges and serves as a case study in AI-related securities litigation. Innodata is a self-proclaimed forerunner in AI-enabled software platforms and services. In the lawsuit, a plaintiff shareholder specifically targets alleged misrepresentations, made by Innodata representatives, related to Innodata's AI capabilities and investments. Filed on Feb. 21, 2024, in the District of New Jersey, the complaint1 purports to represent investors who acquired the company's securities between May 9, 2019, and Feb. 14, 2024, and it appears to be the first lawsuit of its kind – challenging, on behalf of shareholders, representations related to AI investments.
The genesis of the lawsuit was a damning report2 from Wolfpack Research, which contended that Innodata's purported AI initiative was predominantly "smoke and mirrors," relying heavily on low-wage offshore labor rather than proprietary AI technology. The report further criticized the company's minimal investment in AI research and development, suggesting a disparity between public statements and actual financial allocation towards AI innovation.
The lawsuit's allegations, meanwhile, include that Innodata made false and misleading statements regarding its AI technology's viability, the development stage of its "Goldengate" AI platform, and the company's commitments to utilizing AI in significant business contracts, especially within Silicon Valley. The complaint also accuses Innodata of not investing effectively in AI research and development, thereby lacking a reasonable basis for its optimistic pronouncements about the company's technological capabilities, financial prospects, and growth trajectory.
The Innodata securities litigation highlights a new phenomenon of "AI washing" – akin to "greenwashing" in the environmental context – wherein organizations may exaggerate their engagement with AI technologies to capitalize on the surging investor interest in this area. As the case progresses, it is imperative to recognize the broader implications for corporate governance, especially in terms of transparency and accountability in AI-related disclosures. Moreover, this case raises critical questions about the responsibility of directors and officers in ensuring accurate and honest communication regarding their companies' technological endeavors.
The Innodata securities litigation heralds the onset of increased scrutiny, and it may just be the tip of the iceberg, signaling a forthcoming wave of "AI washing" claims and related securities litigation. For example, the U.S. Securities and Exchange Commission (the "SEC") announced just last week that it has issued determinations charging two separate businesses $400,000 in what the SEC characterized as civil penalties.3 The SEC highlighted Dephia's statement that it "put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else." And it highlighted Global Predictions' statement that its was "first regulated AI financial advisor" and misrepresented that its platform provided "[e]xpert AI-driven forecasts." The SEC found both statements to be misstatements.
As these issues continues to evolve, it will be crucial for companies to navigate the complexities of AI-related disclosures judiciously, ensuring that the potential of AI technology is matched by an equally robust commitment to ethical practices and legal compliance. Businesses engaging AI as part of their business model or touting it as a capability may want to be sure to understand the risks inherent in the technology and in making predictions. Understanding the insurance protections, which may be in existing insurance policies held by those same businesses, can be equally important, particularly where allegations may be unwarranted.
Footnotes
1. https://www.dandodiary.com/wp-content/uploads/sites/893/2024/02/Innodata-complaint.pdf
2. INOD: Exposing INOD's "Smoke and Mirrors" AI (wolfpackresearch.com)
3. The SEC announcement can be found here, and a related Insurance Journal article on the topic here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
