Introduction
Artificial intelligence (AI) is front of mind for federal and state law enforcement and regulators. With the rise of accessibility to generative AI-technology, prosecuting and investigatory bodies' scrutiny of the potential misuse of AI is also on the rise. Recent statements by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) as well as recent cases, provide insight into how these agencies intend to combat the misuse of AI, and what companies should consider as they adopt AI technologies.
DOJ
Throughout 2024, the DOJ proclaimed its intent to take action to combat the misuse of AI in the criminal context. For example, in March Deputy Attorney General Lisa Monaco called AI the “ultimate disruptive technology” that “looms larger than ever.” See Office of Public Affairs, Deputy Attorney General Lisa Monaco Keynote Remarks at the ABA's 39th Nat'l Institute on White Collar Crime (DOJ, Mar. 7, 2024). In July 2024, in its annual report to the U.S. Sentencing Commission (USSC), the DOJ Criminal Division asked the USSC to consider a specific AI sentencing enhancement in cases in which AI is used during the commission of, in preparation of, or to avoid apprehension of an offense. See Annual Report to U.S. Sentencing Commission (DOJ, July 15, 2024). In support of such a sentencing enhancement, the Criminal Division pointed to several risks of AI, including that AI “can make crimes easier to commit,” “amplify the harms that flow from crimes,” and “enable offenders to delay and avoid detection.”
Similarly, the criminal division recently revised the evaluation of corporate compliance programs (ECCP) to address AI and emerging technologies, for example, by providing for heightened focus on how businesses proactively manage the risks relating to their use of AI or other emerging technologies. Specifically, in the ECCP guidance, the DOJ identifies several considerations with respect to a company's use of AI that it will consider when evaluating corporate compliance programs, including how a company assesses the potential impact of new technologies such as AI, on its ability to comply with criminal laws, and the AI-related risks that come with the use of AI when it is integrated into broader enterprise risk management; the company's approach to governance regarding AI in its commercial business and in its compliance program; and how the company mitigates the potential for deliberate or reckless misuse of AI.
The SEC
Over the last year, the SEC's public statements about AI have been focused on several key areas including AI-washing, fraud and market manipulation, broker-dealers who use AI to prioritize their interests over their clients' interests, and AI hallucinations causing misstatements in investor-facing materials. Additionally, in its 2025 examination priorities, the division of examinations highlighted AI-related risks that may arise when an investment adviser integrates AI into advisory operations, including portfolio management, trading, marketing and compliance, and made clear its intention to “look in-depth” at compliance policies and procedures, and disclosures to investors related to these areas.
Recent SEC settlements in the enforcement context reflect the SEC's willingness to prosecute securities fraud that incorporate false claims about the use of AI, where it is one of several alleged false statements that form the basis of the securities fraud charge. See, e.g., SEC v. Sewell, 24 Civ. 137 (UNA) (D.Del., Feb. 2, 2024) (SEC brought action alleging securities fraud for false statements about, among other things, Sewell's education and experience and the claimed use of AI in connection with the fund's investment strategy). The SEC has taken an even more aggressive approach in the context of administrative proceedings, charging violations of the Investment Advisors Act for fraud and untrue statements in marketing materials solely relating to the use of AI. See Delphia (USA) Inc., Admin. Proc. Release No. 6573 (Mar. 18, 2024)(Delphia Order); Global Predictions, Inc., Admin. Proc. Release No. 6574 (Mar. 18, 2024)(Global Predictions Order).
In a recent enforcement action, SEC v. Raz, 24 Civ. 4466 (S.D.N.Y. June 11, 2024) the SEC charged the CEO and founder of an AI hiring startup with securities fraud in connection with false or misleading statements the founder made about, among other things, the company's purported use of AI. Specifically, the SEC alleged that Raz operated Joonko—a company marketed as a technology platform that used AI to match customers with diverse job candidates to achieve DEI goals—as a “brazen fraud,” and materially misrepresented several key indicators to current and prospective investors. The SEC also identified as materially misleading, statements about Joonko's purported use of AI, including Joonko's claim that its AI was based on “seven different AI algorithms”, and used a “proprietary algorithm that uses natural language processing” to scan public data about referred candidates. The SEC case is currently stayed pending a parallel criminal case also in the Southern District of New York. While the criminal case charges securities fraud, any allegation regarding the misuse of AI is notably absent from the indictment.
The SEC has taken a more aggressive approach against AI-washing—overstating the role of AI in marketing materials—in administrative proceedings charging violations of the Investment Advisors Act for fraud and untrue statements in marketing materials. In March 2024, the SEC announced separate settlements with two investment advisers, Delphia Inc., and Global Predictions LLC, for making false and misleading statements to current and prospective clients about their use of AI, in violation of Section 206(2) of the Advisors Act, which makes it unlawful for any investment advisor to engage in fraud (no scienter requirement) and Section 206(4) of the Advisors Act and Rule 206(4)-1, which makes it unlawful to make untrue statements in marketing materials. In the case of Delphia, the SEC focused on how Delphia marketed itself as “the first investment adviser to convert personal data into a renewable source of investment capital,” claiming its advice was “powered by the insights it makes when individuals … connect their social media, banking and other accounts … or respond to Delphia questionnaires,” and that this client data was used in a “predictive algorithmic model” for the selection of “stocks, ETFs and options” when in fact it did not because Delphia had not developed the represented capabilities. See Delphi Order at 3. With respect to the Global Predictions matter, the SEC focused on how Global Predictions inaccurately claimed to be the “first regulated AI financial advisor” when it was not, and that its technology incorporated “expert AI-driven forecasts” when it did not.
The New Administration
With the election of Donald Trump to a second term as president, the direction and approach to regulation related to AI is likely to shift significantly. In public statements during his campaign, Trump repeatedly stated his intention to repeal President Joe Biden's executive order (EO) on the “Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence,” which provides principles and best practices on the appropriate use of AI, including combatting algorithmic discrimination, and imposes reporting and testing requirements on owners of powerful algorithms. See, Geller, E., A Trump Win Could Unleash Dangerous AI, Wired (Oct. 21, 2024); see also, Brenner, G. and Slowik, J.P., What Will the Trump Administration Mean for the Regulation of Employer AI Tools?, National Law Review (Nov. 24, 2024). Trump's treatment of AI will likely be closer to the Republican Party platform, which describes President Biden's EO as “dangerous,” and prioritizes “supporting AI Development rooted in Free Speech and Human Flourishing.” See 2024 Republican Party Platform (July 8, 2024). This could mean that any future AI regulation at the federal level will focus more on technological advancement than on a proactive enforcement approach. See Booth, H. and Pillay, T., What Donald Trump's Win Means for AI, Time (Nov. 8, 2024).
Conclusion
The DOJ's and SEC's recent approach to regulating and prosecuting the misuse of AI provides companies with some insights as to what to focus on when adopting AI into its own businesses. While the priorities for the SEC and DOJ during President-elect Trump's second term may be significantly different, both agencies, as well as state prosecutors and regulators, will continue to be on the lookout—and still have tools at their disposal to prosecute—companies and individuals who use of AI in fraud and criminal offenses. Thus, companies should continue to scrutinize its own adoption and use of AI.
Originally published by New York Law Journal.
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