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Innodata Suit Highlights ' AI Washing ' Liability Risk For Cos .
By David Shargel , Rachel Goldman and Patrick Morley ( March 14 , 2024 , 6:31 PM EDT )
Months after U . S . Securities and Exchange Commission Chair Gary Gensler warned [ 1 ] regulated business owners about potential securities law liability over conduct known as AI washing ,[ 2 ] or misleading investors as to the company ' s true artificial intelligence capabilities , a class of plaintiffs has filed suit in New Jersey federal court , seeking damages under this novel theory . [ 3 ]
The Innodata Lawsuit
In February , a software and data engineering company , Innodata Inc ., was sued [ 4 ] in the U . S . District Court for the District of New Jersey by a proposed class of investors alleging its stock price dropped more than 30 % after a financial research firm , Wolfpack Research , published a report saying its artificial intelligence technology was " smoke and mirrors ," and that its marketing claims were akin to " putting lipstick on a pig ."
David Shargel
Innodata investor David D ' Agostino filed the complaint against the company , its President and CEO Jack Abuhoff , interim Chief Financial Officer Marissa Espineli , and former CFO Mark Spelker on behalf of all individuals and entities that purchased or acquired Innodata common stock from May 9 , 2019 , through Feb . 14 , 2024 .
According to the complaint , over the preceding decades , Innodata ' s original data solutions business had slowly decayed as automatic data annotation made the company ' s historical business of offshoring manual data annotation less profitable . In 2019 , Innodata had allegedly begun implementing AI and machine learning processes , and began marketing itself as an AI company .
Rachel Goldman
The complaint asserts that , throughout the proposed class period , Innodata advertised its new AI-focused operations to investors , and the individual defendants repeatedly made positive statements about the company ' s AI expertise and capabilities , along with touting a growing number of Silicon Valley contracts .
But plaintiffs claim that Innodata ' s promises were falsehoods , and that while touting supposed new AI capabilities , the named defendants contradicted their own public statements by privately reducing Innodata ' s research and development spending , in a move that was not disclosed to investors .
Patrick Morley