AI, Crypto Cases Capture Attention in Bottom-Up Securities Year

New securities class actions over artificial intelligence claims and digital assets, one US Supreme Court ruling, and two high court non-rulings helped define the 2024 battlefield between investors and companies.

The high court’s sole private securities law opinion, Macquarie Infrastructure Corp. v. Moab Partners, LP, held that a “pure omission” in a Securities and Exchange Commission filing can’t give rise to a securities class action without some statement shareholders can point to that’s misleading.

The narrowly drawn April ruling sided with the conglomerate on its potential liability for not disclosing a trend affecting its business in the required filing, and touched off a debate over whether its attempt to distinguish omissions from “half truths” will have much effect.

“We’ll have to wait and see how this gets applied in the future,” said attorney Jonathan Youngwood of Simpson Thacher & Bartlett LLP. “The plaintiffs’ bar is of the view that this doesn’t change things that much,” he said. “From the defense perspective, Macquarie was a narrowing of the complaints you can bring.”

The high court’s recent decision to discard two securities cases from its docket represented “a missed opportunity” to address issues that frequently arise when a defendant has asked for dismissal, Susan Hurd of Alston & Bird LLP said. The justices dismissed Facebook, Inc. v. Amalgamated Bank, a suit over risk disclosures alleged to be misleading because they were cast as hypothetical, and NVIDIA Corp. v. E. Ohman J:or Fonder AB, which focused on whether investors had satisfied pleading standards, after hearing argument in each. Review was improvidently granted, the justices said.

“It’s just a shame that we didn’t get ruling on the merits on either one of them, given the fact that they both implicated things that defendants deal with on a daily basis at the motion to dismiss stage,” Hurd said.

“A lot of us were looking forward” to the court’s possible clarification of the pleading standards for misrepresentations and intent in securities fraud cases, Youngwood said.

Class Constriction

An opinion identified by Youngwood and institutional investors’ lawyer Richard Bodnar as having a more sustained effect in 2024 was the US Court of Appeals for the Second Circuit’s decertification last year of a class of investors in a suit against Goldman Sachs Group Inc. in the wake of a 2021 Supreme Court decision in that case.

“From observing it in my own practice, how you’re going to approach class certification seems to come up more and more in the post-Goldman years,” Youngwood said. The defense bar always looks for post-pleadings phase opportunities to “get good information in front of a court for a ruling that either defeats the class or narrows the class,” he said.

“One takeaway from 2024 is that securities class actions are taking longer to resolve,” perhaps due in part to the high court’s Goldman decision, said Bodnar, of Rolnick Kramer Sadighi LLP. Other factors may include court congestion “or issuers and insurers just being more reluctant to settle cases in a higher interest rate environment,” he said.

The longer timelines “have given investors who were damaged by corporate misconduct more time to consider their options, whether via opt outs, derivative actions, or other legal action,” Bodnar said via email.

Fibbing About AI

As machine learning becomes more commonplace, companies sometimes falsely tout their use of it, drawing SEC attention.

“The SEC has been cracking down on a number of companies, largely financial advisors and hedge funds, that the SEC thinks are misleadingly highlighting their AI capabilities,” said Tansy Woan of Skadden, Arps, Slate, Meagher & Flom LLP, who has a corporate defense practice. “Maybe it’s not as effective as you claim that it is, it won’t have the same success that you claim that it will, or that really behind all this is manual labor that’s not actually AI.”

“We’re seeing the same thing in civil litigation,” she said, pointing to data published by Stanford Law School in collaboration with Cornerstone Research. Investors have filed 13 securities class actions this year alleging “AI-washing,” according to the study.

And in a suit against Upstart Holdings, the US District Court for the Southern District of Ohio in September allowed some claims against the loan-matching company over its AI underwriting touts.

The surviving claims focused on statements that were specific and verifiable, Woan said. “We’re going to see a lot of cases filed taking a deep dive into how companies are disclosing their use of AI,” she said.

Companies need to take care with their disclosures, class action defense litigator Hurd said. Generative AI represents a “sea change in the technology,” she said. “People don’t understand that we’ve really had AI for years, and the new piece of it is the generative piece.”

“Companies will need to be thoughtful about their generative AI disclosures, because you can’t assume a fluidity with those concepts” on the part of consumers and investors, Hurd said.

Crypto Novelty

Alexander Drylewski of Skadden, a digital asset litigator, said that area remains very active.

Cases brought by investors and the SEC “have raised interesting and novel issues,” including who can be a statutory “seller” of the supposed securities and “whether and in what circumstances digital assets may be offered and sold as securities,” he said. “We see plaintiffs pushing new and expanded theories of liability to rope in new defendants” for allegedly dealing in unregistered securities.

Whether offering rules and infractions are delineated by the courts, or by formal rule-making, became a recurrent issue in 2024. With the incoming Trump administration avowedly pro-crypto, the former appears more likely.

If SEC enforcement activity against the cryptocurrency industry decreases under the new administration, private securities litigation may increase, Drylewski said. That’s especially likely if it remains unclear, from a regulatory standpoint, when digital assets may be offered and sold without registration—and if digital asset price volatility persists, he said.

Still, for many, 2024 was a Supreme Court year that wasn’t.