Department of Justice and SEC Target AI Washing

Holland & Knight reports on Securities and Exchange Commission v. Theodore J. Farnsworth, J. Mitchell Lowe, and Khalid Itum, a case in which the SEC and the Department of Justice pursued enforcement actions against a former CEO for misleading statements and securities fraud. The case highlights the agencies’ growing focus on deceptive claims about artificial intelligence capabilities, commonly known as AI washing. The SEC secured consent judgments against defendant Theodore J. Farnsworth, the former CEO of Helios & Matheson Analytics Inc. and MoviePass Inc., for making false statements about those companies.

Helios & Matheson acquired MoviePass in 2017 and launched a $9.95 unlimited subscription plan, but the business model was unsustainable. Farnsworth falsely claimed the company would profit from subscriber data analysis despite lacking such technology. When the plan failed, MoviePass restricted user access, violating its terms.

Farnsworth allegedly misled investors about Vinco’s proprietary platform and concealed his control over the company. This facilitated securities transactions exceeding $120 million, some of which the SEC alleged he misappropriated for personal gain.

The SEC filed civil charges against Farnsworth in 2022, but the DOJ later indicted him on related criminal charges, leading to a stay of the civil case. In 2024, he settled the SEC’s civil claims, agreeing to injunctions and bans on serving as an officer or director but leaving financial penalties to be determined after the criminal case.

In January 2025, he pleaded guilty to securities fraud and conspiracy to commit securities fraud.  He is awaiting sentence of up to 20 years in prison on the securities fraud count, and five years on conspiracy to commit securities fraud.

Attorneys should caution clients about public statements regarding AI capabilities, especially when raising capital. False claims can lead to parallel civil and criminal actions, increasing legal exposure. According to Holland &  Knight, “the government’s efforts to regulate AI may slow or pivot under the current administration; don’t expect SEC or DOJ enforcement against AI washing to go away.”