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Yes, but . . . Part 2: Artificial Intelligence, Including Agentic AI
Yes, companies are more susceptible to securities class action lawsuits in the midst of major changes in technology. Rapid change makes it so much harder for companies to provide investors with unassailable disclosure.
And the change du jour? Artificial intelligence.
Frankly, the volume of AI chatter within companies—be it about internal ops or a company’s actual business plan or strategy—doesn’t just seem like it has ramped up incredibly quickly. It’s actually has.
The FOMO is real when it comes to AI. Unfortunately, FOMO doesn’t always lead to the best decision-making.
Also, AI as a term spans an incredibly broad range of risks and opportunities. One we are particularly keeping an eye on is agentic AI.
We can all understand why companies have been so eager to embrace AI agents, especially for customer service. It’s a dream to have agents that are always on and fast to respond.
However, what if these same agents trip into basing their analysis on incorrect data or if they start spreading misinformation? What a nightmare it will be that these agents are always on and fast to respond.
The Wall Street Journal put it succinctly:
After largely failing to grasp the internet, social media, smartphones and e-commerce quickly enough to avoid significant pain, many businesses have already gotten onboard with AI.
As a general matter, we humans are much less tolerant of mistakes made by computers compared to those made by humans. Moreover, the rate at which AI-driven mistakes have the potential to be propagated only amplifies the problem.
Indeed, we are already starting to see litigation (and legislation) on this topic. We’ll surely see more in the future as companies rush to embrace the agentic AI opportunity.
The SEC specifically warned about AI-related disclosure problems back in 2024, and the plaintiffs’ bar has been quick to bring some early disclosure suits.
But . . . does this have to become a larger and ever more problematic trend? No, particularly if companies can be thoughtful about their risk factor disclosures.
Taking a proactive approach to updating risk factors can go a long way to mitigating securities class action risk. A company might still be sued after a stock drop, but it will be much harder for plaintiffs to extract a huge settlement.
Best practices here will include monitoring the disclosures of other public companies (presumably by using AI) as well as being thoughtful about the cadence of updates.
Boards and management teams will also want to consider how AI has amplified the risk posed by malicious disinformation campaigns. Consider the May 2023 incident involving a fake picture of an explosion allegedly near the Pentagon. The picture went viral on social media, resulting in a (thankfully brief) dip in the stock market.
We have all seen the rapid improvement of AI-generated fake images and even videos. The old saw that “A lie can travel halfway around the world like the truth is putting on its shoes” has never been more true. Companies will want to be prepared for a communications sprint if needed.
