Enforcement News: Artificial Intelligence and The Risk of Investment Fraud

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Posted on: Oct 15 2024

Artificial intelligence (“AI”) is everywhere. A person cannot watch television, listen to a podcast or read a newspaper without hearing about AI.

As a new and emerging technology, AI is exciting. Its applications and capabilities are endless. But, in the wrong hands, AI can be dangerous.

Recently, the Securities and Exchange Commission (“SEC”) issued an Investor Alert about AI and the risk of fraud (the “Alert”) (here).[1] The SEC, along with the North American Securities Administrators Association, and the Financial Industry Regulatory Authority, issued the Alert to “make investors aware of the increase of investment frauds involving the purported use of artificial intelligence (AI) and other emerging technologies.” As noted in the Alert, “[i]ndividual investors should know that bad actors are using the growing popularity and complexity of AI to lure victims into scams.”

In the Alert, the SEC identified “a few things to look out for to help [investors] keep [their] money safe from [AI and AI-related] frauds.” Some of the AI and AI-related fraud includes:

Unregistered/Unlicensed Investment Platforms Claiming to Use AI

First and foremost, investors should remember that federal, provincial, and state securities laws generally require securities firms, professionals, exchanges, and other investment platforms to be registered. A promoter’s lack of registration status should be taken as a prompt to do additional investigation before you invest any money. Numerous unregistered and unlicensed online investment platforms, as well as unlicensed and unregistered individuals and firms, are promoting AI trading systems that make unrealistic claims like, “Our proprietary AI trading system can’t lose!” or “Use AI to Pick Guaranteed Stock Winners!” In reality, these scammers are running investment schemes that seek to leverage the popularity of AI.

Investing in Companies Involved in AI

While rapid technological change can create investment opportunities, bad actors often use the hype around new technological developments, like AI or crypto assets, to lure investors into schemes. These bad actors might use catchy AI-related buzzwords and make claims that their companies or business strategies guarantee huge gains. Red flags of these types of scams include high-pressure sales tactics by unregistered individuals, promises of quick profits, or claims of guaranteed returns with little or no risk.

AI-Enabled Technology Used to Scam Investors, Including “Deepfake” Video and Audio

Fraudsters can use AI technology to clone voices, alter images, and even create fake videos to spread false or misleading information. AI technology might be used to impersonate a family member or friend, with the intent to convince an investor to transfer money or securities out of an investment account. For example, some scam artists are using AI-generated audio — also known as “deepfake” audio — to try to lure older investors into thinking a grandchild is in financial distress and need of money. Scammers might use deepfake videos to imitate the CEO of a company announcing false news in an attempt to manipulate the price of a stock, or might use AI technology to produce realistic looking websites or marketing materials to promote fake investments or fraudulent schemes. In addition, we regularly see bad actors impersonating SEC staff and other government officials.

In addition to identifying the foregoing, the Alert provided a number of steps for investors to use to protect themselves from unscrupulous advisors, promoters and fraudsters seeking to lure investors into scams relating to, or using, AI.

On October 10, 2024, the SEC announced (here) charges against Rimar Capital USA, Inc. (“Rimar USA”), Rimar Capital, LLC (“Rimar LLC”), and certain of their officers and directors (collectively, the “respondents”) for making false and misleading statements about Rimar LLC’s purported use of artificial intelligence to perform automated trading for client accounts and numerous other material misrepresentations. As noted in the SEC’s press release, respondents agreed to settle the SEC’s charges and pay $310,000 in total civil penalties.

According to the SEC, the individual respondents raised nearly $4 million from 45 investors for the development of Rimar LLC, an investment adviser that was falsely described as having an AI-driven platform for trading securities. The SEC found that the Rimar entities and the individual respondents also made misrepresentations about Rimar LLC’s assets under management and its investment returns. In addition, the SEC found that Rimar LLC and one of the individual respondents obtained advisory clients using the misleading statements and that the same individual respondent improperly used company funds for personal expenses.

“Through entities he controlled, [respondent] lured investors and clients with multiple fabrications, including with buzzwords about the latest AI technology,” said Andrew Dean, Co-Chief of the SEC’s Asset Management Unit. “As AI becomes more popular in the investing space, we will continue to be vigilant and pursue those who lie about their firms’ technological capabilities and engage in ‘AI washing’.”

Without admitting or denying the SEC’s findings, respondents consented to the entry of an order (here) finding antifraud violations and to cease and desist from violating the charged provisions. The officer respondent consented to pay disgorgement and prejudgment interest totaling $213,611, to pay a $250,000 civil penalty, and to be subject to an investment company prohibition and associational bar with the right to reapply in five years. The director respondent agreed to pay a $60,000 civil penalty. Rimar LLC consented to be censured.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Investor Alert: Artificial Intelligence (AI) and Investment Fraud: Investor Alert, SEC.gov (Jan. 25, 2024).