There's a hot new scam on Wall Street, and, of course, it involves the world's buzziest technology: artificial intelligence.
The Securities and Exchange Commission said Monday that it had charged investment advisers Delphia and Global Predictions for making deceptive claims about their use of AI, a practice known as AI washing. Both firms agreed to settle the charges, according to the SEC.
"Global Predictions cooperated fully with the inquiry and is pleased to put this behind us. Additionally, we have clarified across our marketing how exactly we use AI," the company said in a statement to CNN on Monday. Delphia did not respond to requests for comment.
The firms paid a combined $400,000 in civil penalties, according to the SEC.
"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," SEC Chair Gary Gensler said in a statement on Monday. "Such AI washing hurts investors."
What is "AI washing?" The practice is comparable to greenwashing. But rather than trumpeting phony sustainable practices or a product that is supposedly zero-waste, companies engaging in AI washing falsely state that they use artificial intelligence or misportray their use of the technology.
The Securities and Exchange Commission has also said that a failure to disclose potential risks surrounding AI is a form of deception. Public trading companies who participate in AI washing risk violating US securities law, Gensler warned in a speech last month.
Artificial intelligence buzz helped push stocks into a fresh bull market last year after the launch of ChatGPT in November 2022, despite a backdrop of sky-high interest rates, recession fears and geopolitical turmoil. Although experts have touted positive uses for AI, many worry about potentially disastrous consequences including security risks, unmitigated spread of disinformation and even human extinction.
The Federal Trade Commission has warned that AI could spur a "turbocharging" of scams and fraud, and that existing laws give the US government the ability to crack down on AI-borne consumer harm.
How can investors protect themselves against AI washing and other AI scams? The SEC Office of Investor Education and Advocacy has best practices for investors to avoid such schemes. Here are some of them:
▸ Make sure that any investment adviser, exchange or platform that you engage with is registered. You can do that for free through the SEC here.
▸ Use information from several, verified sources before deciding where to put your dollars. Fraudsters can use AI to clone voices or generate fake video impersonating legitimate sources like government agencies or even your friends and family.
▸ Be skeptical of endorsements from celebrities or influencers. The product or service they're promoting could be a scam or just not right for your investment goals.
▸ Review company disclosures and marketing tactics. Look for warning signs, such as a focus on promotions to attract investors rather than growing its business. You can find public companies' disclosures in the SEC's EDGAR database.
▸ If it sounds too good to be true, it probably is. Promises of a guaranteed, turbocharged return with little to no risk are immediate red flags.
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