By Chris Prentice | REUTERS
The U.S. Justice Department’s top prosecutor in San Francisco is targeting artificial intelligence (AI) and other tech start-ups that defraud investors before they go public, he told Reuters.
Ismail Ramsey, who became U.S. attorney for the Northern District of California a year ago, said his office is uniquely positioned to crack down on tech start-ups that mislead investors on the path to initial public offerings (IPOs) given his proximity to Silicon Valley venture and angel investors.
“These ‘fake it til you make it’ pre-IPO frauds erode the integrity of public and private financial markets,” he told Reuters in an interview.
To generate interest in a prospective offering, entrepreneurs may be tempted to mislead investors about key information, including customer reach, revenue base and product readiness, he said.
High-profile examples of such frauds by start-ups include Theranos, whose founder Elizabeth Holmes and president Ramesh “Sunny” Balwani were convicted of deceiving Silicon Valley investors about the start-up’s blood-testing technology, or uBiome Inc, a San Francisco start-up whose co-founders were charged with defrauding investors about its ability to expand clinical tests to monitor gut health.
Private companies typically receive less public and regulatory scrutiny, and the onus is on investors to do their due diligence. The evidence needed for prosecutors to pursue these cases can be harder to unearth, as such companies are not required to publish disclosures.
AI will be a key focus, said Ramsey. Investor excitement around AI stocks such as Nvidia has helped push U.S. markets to new highs in recent months.
“As with any such emerging technologies, AI is fertile ground for fraudsters to make false and exaggerated claims,” said Ramsey, who was previously a partner at Ramsey & Ehrlich LLP in Berkeley and before that an assistant attorney in the office he now runs.
The U.S. government has been ratcheting up scrutiny of AI. The Securities and Exchange Commission (SEC) on Monday fined two investment advisers over their statements related to AI.
Ramsey tapped Jina Choi in late 2023 to lead a team focused on corporate crime such as securities and accounting fraud.
Choi was most recently a partner at law firm Morrison & Foerster and before that led the SEC’s regional office in San Francisco. Under her watch, the SEC brought civil charges against Theranos, Tesla Inc and its CEO Elon Musk, and the company formerly known as Yahoo!.
The team is currently prosecuting a high-profile case against a UK tech entrepreneur once hailed as Britain’s answer to Bill Gates whose trial kicked off on Monday.
Ramsey has also created a team dedicated to cybersecurity and intellectual property theft. That unit was behind an indictment unsealed earlier this month against a former Google software engineer charged with stealing trade secrets.
Editor’s Note: Reporting by Chris Prentice; Editing by Michelle Price and Stephen Coates