A trading firm has settled charges with the SEC after the agency accused it of faking its artificial intelligence (AI) capabilities and misleading investors to raise almost $4m. 

Rimar Capital, Rimar Capital USA, and the companies’ CEO Itai Liptz, plus Rimar USA board member Clifford Boro together paid a $310,000 civil penalty to settle fraud-related charges – which they did not admit or deny – the SEC said. 

Liptz and Clifford Todd Boro own approximately 93% and 5%, respectively, of Rimar USA. Liptz serves as Rimar USA’s investment manager and CCO. The two claimed Rimar had between $16m and $20m in assets under management when it “actually had less than $2 million.”

Misleading statements

According to the SEC order, Liptz, with the help of Boro, raised the money 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 order found that the Rimar entities, Liptz, and Boro also made misrepresentations about Rimar LLC’s assets under management and its investment returns. In addition, the SEC alleged that Rimar LLC and Liptz obtained advisory clients using the misleading statements, and that Liptz misappropriated company funds for personal expenses.

The parties held Rimar LLC out as an adviser that used AI to perform automated trading for advisory client accounts in a range of products including equities, futures, and crypto assets, through a series of misrepresentations about the platform’s features, its assets under management, its performance, and its supposed AI-powered application.

These same misrepresentations were also made to obtain advisory clients, many of whom became clients after investing in an offering of agreements for future equity (SAFEs) in a holding company, the SEC said.

[M]arketing materials and solicitation communications repeatedly referred to Rimar LLC as having an artificial intelligence-driven platform for trading stock and crypto assets.

Liptz also improperly used some of the SAFE proceeds for personal purposes, the SEC contended.

“Through entities he controlled, Liptz 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’.”

Deeper dive

The SEC alleges the statements were misleading or exaggerative in a couple of ways.

For example, Liptz and Boro, through Rimar USA, made claims in pitch decks, online posts in a members-only investment group, and emails about the expansive technological operations of Rimar LLC, such as its supposedly extensive infrastructure of coders and data processing capabilities. The claims were said to be misleading given that they referred to the operations of the Overseas Entities, in which neither Rimar USA nor Rimar LLC had any ownership interest.

The marketing materials and solicitation communications also repeatedly referred to Rimar LLC as having an artificial intelligence-driven platform for trading, among other products, stock and crypto assets. But the firm had no trading application at all at the time of the fundraising, and has never had a trading platform for stock or crypto assets.

Charges

As a result of the conduct described above, the SEC said Rimar USA committed violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and SEC Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities.

And the agency said Rimar LLC willfully violated Sections 206(1) and 206(2) of the Advisers Act, which prohibit fraudulent conduct by an investment adviser.

SEC said Liptz also violated the fraud rule, SEC Rule 10b-5.

Regulators vigilant about AI washing

In June, the founder of a now-bankrupt AI recruitment start-up called Joonk was charged by the SEC and the US Attorney’s Office for the Southern District of New York (SDNY).

The complaints allege that Raz raised money for Joonko by making false claims about the number of customers the company had, the number of active job candidates it was working with, and the amount of revenue it earned, according to the releases.

In that case, former director of the SEC’s Division of Enforcement, Gurbir Grewal, said: “We allege that Raz engaged in an old-school fraud using new-school buzzwords like ‘artificial intelligence’ and ‘automation.’ As more and more people seek out AI-related investment opportunities, we will continue to police the markets against AI-washing and the type of misconduct alleged in today’s complaint.”

At a conference late last year hosted by news outlet The Messenger, SEC Chair Gary Gensler said that securities laws bar phony claims and require companies to give “full, fair and truthful” disclosures.

“Don’t do it,” he said. “One shouldn’t greenwash and one shouldn’t AI wash.” Making unfounded AI claims to the public about one’s AI technology and capabilities can lead to an enforcement action, he said, and the attendant compliance remedial undertakings many such actions include.