AI Stock Swings Emerge as Legal Focal Point After DeepSeek Chaos

Investor lawsuits over companies’ claims about artificial intelligence are expected to swell thanks to surprises such as DeepSeek, refocused regulators, and overall more organizations chattering about it, lawyers say.

The speed of AI development means market moves—and ensuing lawsuits. After DeepSeek’s chatbot emergence stung stocks exposed to AI in January, questions of related litigation swirled.

“Whether that was foreseeable and should have been disclosed as a risk is a real question given that it seemed to take so many people by surprise,” said Edward Best, a partner at Willkie Farr & Gallagher LLP, noting companies that acted in good faith shouldn’t worry about liability.

AI washing, like greenwashing over environmental claims, is the overhyping of a company’s AI capabilities or benefits. At least 43 securities cases over AI claims have been filed since March 2020, according to Stanford Law School. The latest companies targeted by such suits include industry bellwethers like The Trade Desk Inc., Telus International (CDA) Inc., and GitLab Inc.

Signals of a Securities and Exchange Commission crackdown on AI that started under the Biden administration are expected to survive the change in leadership, said Nili Moghaddam, a partner at Boies Schiller Flexner LLP.

“What we’ve seen in the government’s regulatory inquiries and enforcement actions to date around AI is out-and-out fraud,” said Moghaddam. “I can’t imagine that the Trump administration would be in any way more relaxed about just basic fraud with the subject of the fraud being a new technology, in this case, AI.”

A narrower approach to SEC enforcement generally will probably leave more on private securities litigators to look into claims of AI washing, said James Christie, a partner at Labaton Keller Sucharow LLP.

Referencing the news surrounding DeepSeek’s January announcement, Christie said questions around heavy investing in AI companies “is kind of where you may see some stock drops, where a company goes way over leveraged on buying into what’s supposed to be this incredible technology and it turns out that a competitor is able to do it much more easily and cheaper.”

Querying how companies plan to use and discuss AI can be tricky due to some of its “black box” nature, said Katherine Staba, a partner at K&L Gates LLP. But that doesn’t change how leadership should think about mitigating the risk of overstatements. “The foundational questions are the same,” she said. “There’s just more to ask.”

Do risk assessments, said Moghaddam, and have in-house counsel or compliance professionals study existing AI securities class actions. With heightened AI scrutiny, she said, “focus on building out the right governance framework and the right processes and procedures to ensure that they don’t get ensnared in claims about misleading or false representations around AI, or claims about failures to disclose the risks attendant on AI, those are really the buckets of claims that we’re seeing.”

Christie said of companies listing on the market, it’s worth noting that “AI washing is much more susceptible to claims under the Securities Act of 1933 because when it’s an offering, the company is relatively new and you have that added factor of investors not having a full understanding of what a company does.”

Misunderstandings will happen either way, particularly with new technology that companies and investors are figuring out how to discuss, said Charlene Liu, a partner at Haynes Boone who has a PhD in electrical engineering.

“When such cases come up at the district court or from the SEC, I see some of the cases are basically dismissed,” Liu said. “Because, I guess it’s really very hard to delineate: Was that an overstatement? Was that a lack of information, or is it a somewhat innocent disconnect between engineers and business people?”