AI Biz Brass, Accounting Firm Shake ‘Fake Revenue’ Suit

The leaders of a now-bankrupt artificial intelligence company and its former accounting firm have escaped a lawsuit brought by investors alleging the AI company used so-called round-trip transactions with a business partner to generate false revenue, after a Maryland federal judge found the shareholders have not shown the transactions or the business relationship were improper.

In an opinion entered Friday, U.S. District Judge Deborah K. Chasanow granted with prejudice five dismissal bids brought by accounting firm Marcum LLP and individual defendants who once held leadership roles at iLearningEngines Inc, finding, among other things, that the investors’ latest version of their suit failed to support their assertion that iLE’s revenue was “apparently fake.”

Specifically, the judge wrote, the suit failed “to allege that iLE made any false representation about its revenue,” and the investors had assumed, “without adequate explanation,” that the company initiated so-called round-trip transactions without any economic substance with a company iLE called a “technology partner.”

Judge Chasanow also said the investors failed to show the company had a duty to disclose that its technology partner, Experion Technologies FZ LLC, was a related party, finding the suit didn’t explain how the allegation squared with the definition of a related party under generally accepted accounting principles in the U.S.

The court noted the investors had demonstrated “considerable overlap in personnel between iLE and Experion entities,” but nonetheless failed “to spell out beyond conclusory allegations that this overlap constitutes significant influence or control over Experion.”

According to the stockholders’ complaint, iLE was founded in 2010 and marketed itself as a “learning as a service platform” for the healthcare industry until 2020, when it began describing the business as an “[AI] powered learning platform.” The company went public via a merger with special purpose acquisition company Arrowroot Acquisitions Inc. that closed in 2024.

In the latest version of the investors’ claims, plaintiffs Louis Leveque and Iqbal Al Hamid said iLearningEngines’ share price fell to near zero for several months in 2024, after a short-seller report alleged the AI company’s revenues were “largely fake” due to substantial transactions with Experion. 

The suit said the short-seller report precipitated an internal investigation and an announcement that the iLE’s recent financial statements shouldn’t be relied on. The company also placed certain executives on administrative leave as it probed the allegations before it launched a bankruptcy case, which the debtor later converted from a reorganization under Chapter 11 to a Chapter 7 liquidation. Trading prices for the company’s shares fell with each of its adverse disclosures in the leadup to the bankruptcy filings and subsequent stock-market delisting, the investors said.

On Friday, the court also held that the investors hadn’t shown that the iLE executives intentionally misled the markets, as is required under the Private Securities Litigation Reform Act.

The complaint’s allegations “do not raise an inference of scienter at least as compelling as the innocent alternative,” the judge said, rejecting a generalized assertion that the company’s senior executives necessarily would have known about the structure of the relationship and payments between iLE and Experion.

Judge Chasanow also determined that the short-seller report doesn’t qualify as a corrective disclosure, noting the relevant report included a disclaimer stating its authors didn’t make any representations about the report’s accuracy, among other things.

Separately, the court found the disclosures that investors alleged were corrective did not present new information and failed to show the purported securities fraud had caused their losses.

The judge also rejected the shareholders’ argument that they had standing, saying they failed to demonstrate that their shares were clearly traceable to relevant registration filings. Because the investors have not shown they had standing or proved material misrepresentations, the judge said, her analysis didn’t need to reach Marcum’s arguments that the investors hadn’t stated a claim against it.

In addition to Marcum’s dismissal bid, motions to dismiss were filed by former iLE CEO Harish Chidambaran; former CFO Sayyed Farhan Naqvi; Thomas Olivier, who became interim CEO when Chidambaran was placed on leave amid the internal investigation; and iLE directors Matthew Barger, Ian Davis, Bruce Mehlman and Michael Moe, who moved for dismissal together.

On Monday, Jorge Piedra, an attorney representing Olivier, told Law360 that “to have [Olivier] dismissed from this lawsuit is a true vindication and recognition that he did nothing wrong.”

Representatives of the other parties did not immediately respond to requests for comment Monday.

Olivier is represented by Jorge L. Piedra, Rasheed K. Nader and Alexa G. Chinchilla of Kozyak Tropin Throckmorton and Philip A. Selden and Alicia L. Shelton of Cole Schotz PC.

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