Artificial Intelligence Fraud Is Sometimes Like Every Other Kind of Securities Fraud
Remember crowdfunding? Does anybody do that anymore? I remember having a conversation about it when it was a new securities thing and saying, “Of course, people will do fraud with it.” And my colleague said, “No . . .” as if the very idea was preposterous. I wasn’t really for or against crowdfunding but just making the point that someone would take advantage of this new capital raising mechanism and try to scam somebody else under its auspices.[i] People will try to do fraud with anything.
And so with artificial intelligence.[ii]
Rimar LLC is a state-registered IA that claims to offer a range of AI-driven, automated trading strategies. It’s owned by Rimar Capital USA, Inc., which is itself owned 93% by Itai Royi Liptz and 5% by Clifford Todd Boro. Liptz was its only investment manager. By mid-2023, Rimar LLC said it had 54 clients that it advised on security futures trading. Its marketing materials say otherwise, but the firm has never offered trading services related to stocks, bonds, or crypto assets.
Between 2022 and 2023, Liptz and Boro offered investors these things called SAFEs. “SAFE” stands for Simple Agreement for Future Equity, and is an agreement between an investor and a company in which the company generally promises to give the investor a future equity stake if some trigger events occur. For these SAFEs, investors would get equity in Rimar USA in the event of any equity financing and a share of proceeds if an IPO happened. In total, Rimar USA raised $3.725 million from 45 investors. According to pitch decks published to some prospective investors in the SAFEs, the proceeds were intended to be used for “additional engineering,” “compliance,” development of an app, and Rimar LLC’s sales and marketing.
Misstatements
The marketing materials and communications to prospective investors contained a range of false and misleading statements regarding Rimar LLC.
They overstated Rimar LLC’s assets under management.
They overstated Rimar LLC’s technological operations, including claims about coders and data processing capabilities.
Their marketing materials and solicitations repeatedly referred to Rimar LLC as having an AI-driven platform for trading stock and crypto assets. The firm had no trading application at the time, and has never had a trading platform for stock or crypto assets.
They said Rimar LLC was managing a “hedge fund,” but its only clients were separately managed accounts.
They made misleading statements about Rimar LLC’s managed client account performance.
The marketing materials supposedly contained three months of returns in the accounts of Rimar LLC’s clients, but they were derived instead from a single account in the name of Rimar LLC itself.
Many of the things touted in these statements were attributable to some mysterious “Overseas Entities” that were not Rimar LLC, Liptz, or Boro.
Some marketing materials said the SAFE proceeds would be used to develop a “Hedge Fund for everyone app”. The order doesn’t actually say they didn’t build it. Liptz used some of the proceeds for personal purposes but the SEC’s order doesn’t list anything fun like a boat or beach house.
Anyway, the SEC charged Liptz with fraud, and he is paying combined monetary sanctions of just over $463,000. Boro is settling to negligence-based charges and will pay a civil penalty of $60,000.
Lessons
This case isn’t as earth-shaking as some headlines might suggest. Everything is _________-washing these days. I guess this is “AI washing”? If you do regular accounting fraud is that revenue washing? If you’re an investment adviser and you say you have artificial intelligence that will benefit investors, you have to have that AI, or you could get in trouble. None of the Rimar entities did.
In re Rimar Capital USA, Inc., Admin. Proc. File No. 3-22236 (Oct. 10, 2024)
[i] And somebody did! SEC Charges Crowdfunding Portal, Issuer, and Related Individuals for Fraudulent Offerings, SEC Press Release (Sept. 20, 2021).
[ii] All of the “facts” that follow are from the SEC’s administrative order, are really just allegations, and might not be true.