AI Washing Sparks Investor Suits and SEC Scrutiny

The AI boom of the 2020s is increasingly reminiscent of the dot-com era, when investors filed fraud suits against companies that invoked the internet revolution without a viable product. Or, the more recent blockchain fad, where simply adding Blockchain to a company’s name invited both a stock bump and an SEC inquiry. 

Today, AI washing has entered the lexicon to describe the practice of exaggerating or misrepresenting a company’s AI capabilities to appear more innovative or valuable; it is the AI analog of greenwashing, and it can mislead investors. 

Investor enthusiasm is driving this trend. In one FactSet review last year, nearly 200 S&P 500 companies used the term “AI” on earnings calls in just a two-month period. This surge in references shows how quickly AI has become a shorthand for value, a signal to investors that a company is innovative and worth more, but the gap between hype and reality is now raising eyebrows in the securities bar.

Investor Class Actions Over Inflated AI Claims

Investors are beginning to push back on companies whose AI promises don’t match reality, as exemplified by the recent shareholder suit against Apple.

In June 2025, shareholders filed a class action lawsuit (Tucker v. Apple Inc et al, U.S. District Court, Northern District of California, No. 25-05197) against the tech giant. According to the complaint, Apple’s June 2024 Worldwide Developers Conference led the market to believe that AI would be a key driver of the upcoming iPhone 16, as Apple unveiled an Apple Intelligence initiative to make Siri far more powerful. Yet Apple allegedly had no functional prototype of the advanced Siri features it was promoting, nor any reasonable belief that these capabilities would be ready in time for the iPhone 16.

In March 2025, Apple delayed its Siri upgrades to 2026, and by the June 2025 conference it became clear that Apple’s AI progress was more modest than hoped. Apple’s stock price plummeted, losing nearly one-quarter of its value (about $900 billion in market capitalization) from its peak as investors recalibrated their expectations. The lawsuit alleges that Apple’s AI claims amounted to securities fraud once the company’s true AI readiness (or lack thereof) was brought to light. 

Apple is the highest-profile target so far, but far from the only one. Other examples include C3.ai, Inc., which faced a class action in August 2025 alleging it misled investors about the adoption and performance of its AI technology. And Elastic N.V., which was sued in early 2025 after claims that its executives overstated AI integration in its products. 

SEC and DOJ Step Up AI Enforcement

The SEC is going after false AI claims, too. Alongside the Department of Justice, the two federal agencies launched a series of enforcement actions targeting AI washing over the past two years. 

SEC Chair, Gary Gensler, says:

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

The SEC’s Enforcement Division has named fraudulent AI claims an immediate priority, creating a dedicated Cybersecurity and Emerging Technologies Unit (CETU) in February 2025 to focus on AI-related misconduct. At a May 2025 enforcement forum, SEC officials stressed that staff are scrutinizing how companies, both startups and public issuers, describe their AI tech to investors, to see if they are genuinely using machine learning or merely repackaging old automation under an AI label. 

Here are a few recent examples of SEC enforcement actions:

In March 2024, Delphia (USA) Inc. and Global Predictions Inc. settled charges after falsely claiming to use sophisticated AI-driven investing models - one even promoted itself as the “first regulated AI financial advisor.” In reality, both lacked the advertised AI capabilities. Delphia agreed to pay a $225,000 penalty and Global Predictions $175,000.

In January 2025, the SEC issued a cease-and-desist order against Presto Automation Inc. for misleading disclosures about its drive-thru voice assistant. While the company described the product as “proprietary AI,” regulators found it was largely powered by a third-party vendor and required significant human intervention.

Finally, in April 2025, the SEC and DOJ jointly charged Albert Saniger, founder of Nate, Inc., after he raised more than $42 million by portraying his shopping app as AI-powered. In fact, transactions were being processed manually by overseas contractors, which has led to both civil and criminal proceedings.

Regulators are putting the market on notice: securities fraud is still securities fraud, even when dressed up in AI buzzwords. As acting US Attorney Matthew Podolsky put it: 

“This type of deception not only victimizes innocent investors, it diverts capital from legitimate startups, makes investors skeptical of real breakthroughs, and ultimately impedes the progress of AI development.”

The message is clear: AI hype without substance isn’t just a PR risk, but a securities law risk. Investors, boards, and regulators alike must now recognize that AI washing has become a significant form of market fraud.

See Financial Misconduct Sooner

Using AI-powered legal intelligence, Darrow has developed methodologies to surface emerging securities fraud patterns, including AI-washing claims, and are closely tracking these cases as they move through the courts. While securities litigation do present unique procedural challenges, our approach allows us to identify potential claims and trends that impact investors and the market.

Darrow delivers early intelligence across capital markets, equipping legal teams with the clarity and foresight to act before the damage is done.

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