In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, examines the question whether the SEC should adopt AI-specific disclosure guidelines with reference to two recent enforcement actions involving tech companies allegedly fraudulent claims about their technology. I would like to thank Sarah for allowing me to publish her article on this site. Here is Sarah’s article.
********************
In the current business environment, most companies face increasing pressure to demonstrate their artificial intelligence (AI) credentials. Unfortunately, some companies, in responding to this pressure, have overstated their AI prospects or capabilities, a phenomenon commonly described as “AI-washing.” These concerns have prompted renewed debate over whether the Securities and Exchange Commission should adopt AI-specific disclosure guidance to address the risk of misleading technology narratives.
In considering whether AI disclosure guidance would be beneficial, it is useful to examine concrete examples of alleged overstatements of technological capabilities. Two such examples are the November 2025 criminal indictment of Marcus Cobb, the CEO of Mozaic Payments, Inc., and an early 2010s SEC enforcement action against e-Smart Technologies. Although separated by more than a decade and involving different technologies, both matters illustrate how seemingly impressive technology narratives can become central features of alleged fraud schemes.
SEC Investment Advisory Committee Recommendation
That debate recently resurfaced following recommendations by the SEC’s Investment Advisory Committee urging the Commission to consider AI-related disclosure guidelines. At the same time, SEC Chair Paul Atkins and at least one other commissioner have publicly indicated that they do not believe new, AI-specific disclosure rules are necessary, pointing instead to existing anti-fraud and disclosure frameworks. This divergence may raise an important question for issuers, boards, and insurers alike: whether the absence of AI-specific disclosure guardrails could increase the risk of AI-related fraud and the resulting D&O exposure.
As D&O Diary readers may recall, in early December, the SEC’s Investment Advisory Committee held its quarterly meeting and considered questions concerning AI-related disclosures, including a discussion draft prepared in advance of the meeting. The draft recommendations emphasized three pillars of disclosure: (1) defining what a company means when it claims to use “AI,” (2) explaining the board’s oversight of AI deployment, and (3) providing separate disclosures regarding how AI affects internal operations and consumer-facing products.
The Committee expressed concern that vague or inflated references to AI could mislead investors by obscuring how, or whether, AI is actually deployed in a company’s business. The proposed framework was intended to reduce AI-washing by requiring issuers to substantiate AI claims with greater specificity. Despite these concerns, Chair Atkins has suggested that existing disclosure and anti-fraud rules are sufficient to address misleading AI statements, leaving open the question of whether additional guidance is necessary.
The Mozaic Indictment
The indictment of Marcus Cobb provides a recent example of how AI-focused narratives can allegedly be used to defraud investors. According to the charging document, Cobb orchestrated a two-year scheme to defraud a Boston-based private equity firm by fabricating nearly every material aspect of Mozaic Payments’ business operations and financial condition. Mozaic publicly portrayed itself as an AI-powered platform capable of processing automated royalty-split payments for the entertainment industry. In reality, according to prosecutors, neither the Mozaic app nor its API functioned, and the company generated no revenue.
Beginning in early 2023, Cobb and a co-conspirator allegedly created fictitious customers, fake testimonials, falsified financial statements, and doctored bank records to induce the investment firm to provide funding. These materials included fabricated balance sheets, false QuickBooks records, altered bank statements showing positive cash flow, and claims of rapidly growing revenue. In September 2023, the investor reportedly provided Mozaic with $20 million in funding in exchange for equity and board representation.
After securing the investment, Cobb allegedly continued to provide false quarterly financial reports portraying Mozaic as a healthy, revenue-generating enterprise. According to the indictment, the company’s financial condition was deteriorating, and the investor funds were largely spent on personal expenses. By early 2025, nearly all of the investment capital was gone, and Mozaic collapsed shortly thereafter. Cobb has been charged with conspiracy to commit wire fraud and faces potential forfeiture of assets tied to the alleged scheme.
The e-Smart Enforcement Action
The Mozaic indictment is not the first time regulators have confronted allegations involving exaggerated technology claims. In its 2012 enforcement action against e-Smart Technologies, a publicly traded biometric “smart card” company, the SEC prevailed on its civil fraud claims in 2015. The SEC alleged that e-Smart’s executives repeatedly told investors that the company had developed a commercially viable fingerprint-matching smart card, when in fact the technology did not function as represented.
According to the SEC, e-Smart claimed to possess proprietary biometric sensors, near-zero error rates, wireless functionality, and a multi-application security platform. Evidence presented by the SEC showed that the company relied on fragile, off-the-shelf components and that key advertised features did not exist in a commercially deployable form. The district court granted summary judgment for the SEC, finding that the company’s chief technologist made materially false statements with scienter in violation of federal securities laws.
Discussion
Both Mozaic and e-Smart illustrate how ostensibly impressive technology narratives can obscure operational reality and mislead investors when the underlying technology does not perform as described. While the technologies at issue differed, the alleged pattern was similar: executives promoted transformative capabilities that regulators later concluded did not exist in a commercially viable form.
Viewed in this light, the Mozaic indictment reflects precisely the type of risk identified by the SEC’s Investment Advisory Committee. The Committee cautioned that companies often invoke “AI” without explaining what the technology actually does, how it is validated, or what limitations exist. Mozaic’s alleged conduct, if proven, would exemplify those concerns. The case also underscores the importance of board oversight, another theme emphasized in the Committee’s recommendations, particularly with respect to monitoring high-risk product claims and the accuracy of AI-related disclosures.
For D&O underwriters, these cases highlight how AI or technology-adjacent claims can quickly become the centerpiece of misrepresentation allegations. Statements in offering documents, pitch decks, investor communications, and board materials describing AI functionality as deployed, revenue-generating, or central to the business model may carry heightened materiality risk if they cannot be substantiated.
Although uncertainty remains as to whether the SEC will adopt AI-specific disclosure requirements, expectations around AI transparency appear to be rising regardless. Whether or not formal guidance emerges, Mozaic and e-Smart serve as reminders that technology-driven narratives, particularly those involving emerging or poorly understood technologies, can rapidly evolve into regulatory actions, civil litigation, and D&O exposure.
The views expressed on this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This site is not affiliated with the author’s company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.