Artificial Intelligence Or Artificial Claims? Exploring The Innodata Securities Litigation – New Technology

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.