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Blowing the Whistle on AI Investment Fraud
Tuesday, February 13, 2024

In recent weeks, U.S. regulators have issued warnings on fraudsters using claims about artificial intelligence (AI) to lure investors and customers into scams. Individuals with original information about AI scams can anonymously blow the whistle and qualify for monetary awards under the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) whistleblower programs.

CFTC Advisory on Artificial Intelligence Scams

“Fraudsters are exploiting public interest in artificial intelligence (AI) to tout automated trading algorithms, trade signal strategies, and crypto-asset trading schemes that promise unreasonably high or guaranteed returns,” writes the CFTC in a recent Customer Advisory. “Don’t believe the scammers. AI technology can’t predict the future or sudden market changes.”

In recent years, the CFTC has taken a number of enforcement actions against fraudsters who, according to the agency, “defrauded customers by operating or marketing commodity pools, digital assets, or ‘investment programs’ that promised regular, above-average returns through the use of AI.”

For example, in a historic case highlighted in the CFTC’s advisory, a South African CEO, Cornelius Johannes Steynberg, was ordered to pay over $3.4 billion for a massive forex fraud that involved false claims about an AI trading bot.

The CFTC explains the mechanics of Steynberg’s scam:

“For as little as $100 in bitcoin, and with ‘no trading experience required,’ customers could buy into his commodity pool that used a proprietary bot trading program that guaranteed at least a 10 percent monthly return (or more than 200 percent per year) trading foreign currencies.”

“In reality, very little money was actually traded. Instead, it operated as a Ponzi scheme with some money from new investors used to pay older investors and the rest misappropriated by Steynberg.”

“Unfortunately, AI has become another avenue for bad actors to defraud unsuspecting investors,” said Melanie Devoe, Director of the CFTC’s Office of Customer Education and Outreach.

SEC Alert on AI and Investment Fraud

An article jointly issued by the SEC, the North American Securities Administrators Association (NASAA), and the Financial Industry Regulatory Authority (FINRA) warns investors about the emergence of investment frauds centered around AI.

“Numerous unregistered and unlicensed online investment platforms, as well as unlicensed and unregistered individuals and firms, are promoting AI trading systems that make unrealistic claims like, ‘Our proprietary AI trading system can’t lose!’ or ‘Use AI to Pick Guaranteed Stock Winners!’” the article states. “In reality, these scammers are running investment schemes that seek to leverage the popularity of AI.”

Soon after the article was published, the SEC announced it settled charges against Brian Sewell, the founder of the American Bitcoin Academy.

According to the SEC, “From at least early 2018 to mid-2019, Sewell encouraged hundreds of his online students to invest in the Rockwell Fund, a hedge fund that he claimed he would launch, and which would use cutting-edge technologies like artificial intelligence and trading strategies involving crypto assets to generate returns for investors.”

However, the SEC alleges that Sewell “received approximately $1.2 million from 15 students but never launched the fund nor executed the trading strategies he advertised to investors, instead holding on to the invested money in bitcoin.”

“Whether it’s AI, crypto, DeFi or some other buzzword, the SEC will continue to hold accountable those who claim to use attention-grabbing technologies to attract and defraud investors,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

CFTC and SEC Whistleblower Programs

The CFTC and SEC Whistleblower Programs were established alongside each other with the passage of the Dodd-Frank Act in 2010. The programs offer anonymous reporting channels and anti-retaliation protections to whistleblowers.

Furthermore, qualified whistleblowers, individuals who voluntarily provide original information that leads to a successful enforcement action, are entitled to monetary awards of 10-30% of the funds collected in the action. Combined, the Dodd-Frank programs have awarded more than $2 billion to whistleblowers.

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