Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D.N.Y.: Claims against AI firm mostly dismissed but Reg S-X disclosure claims move ahead, (Aug 11, 2026)

By Mark S. Nelson, J.D.

The court also dismissed SOX certification claims and partially dismissed controlling persons claims.

Investors who alleged that an AI company failed to break out certain costs in its financial disclosures in a registration statement will be allowed to pursue some of those claims, including related controlling persons claims, according to a recent court opinion. However, certain Securities Act and Exchange Act claims were dismissed, while the plaintiff may amend some claims related to executive certifications of financials and controlling persons (Shiyao v. Xiao-I Corporation, No. 1:24-cv-07837-GHW (S.D.N.Y. Aug. 7, 2026)).

Company slowly details its operations. When Xiao-I Corporation went public, it reported financial data for some but not all of its lines of business. Upon filing its annual report, the company made disclosures about five lines of business instead of the previously disclosed four, although data was still presented in the aggregate. The company later filed a revised annual report in response to SEC staff comments that also included more details about regulatory risks in China.

The company’s stock price fell following a revised annual report and then fell again after the company filed a periodic report with additional information. Specifically, the company’s Chinese subsidiaries could not obtain bank accounts to enable use of IPO proceeds.

Reg. S-X violation survives. The complaint alleged that Xiao-I Corporation violated the SEC’s Regulation S-X, the regulation that governs most technical accounting-related disclosures in registration statements and periodic reports filed with the agency. According to the complaint, the company failed to provide discrete measures of key metrics as required by the regulation.

The court explained that Regulation S-X Rule 5-03(b)(2) requires companies to address in their disclosures five classes of net sales and gross revenues items and, thus, state the costs and expenses for sales and revenues (e.g., net sales of tangible products). Companies also must provide a separate statement of the amounts of various costs (e.g., costs of tangible goods sold), The regulation allows some smaller amounts (no greater than 10 percent) to be included in other classes.

Within this framework of financial disclosure, the court further explained, is a requirement to disclose information about “services,” a term the regulation does not explicitly define, and which was the basis of the complaint’s allegations against Xiao-I Corporation. Relying on Black’s Law Dictionary and Merriam-Webster Dictionary Online, the court said “services” means “the performance of some useful act…for the benefit of another…for a fee” (the full definition cited by the court suggested that a fee might or might not be paid).

Here, the court concluded that the complaint adequately pleaded that Xiao-I Corporation violated Regulation S-X Rule 5-03(b)(2) because the company failed to break out costs of some services in its financial statements. For example, the court noted that the company had “maintenance and support (‘M&S’) service” costs that were in excess of 10 percent of total revenue and, thus, should have been broken out into a separate disclosure for the affected reporting periods. The court reasoned that the regulation mandated the separate disclosure for items accounting for more than 10 percent of total revenues and in so doing rejected the company’s argument that Regulation S-X did not require disclosure that precisely reflected its balance sheet and that an SEC comment letter did not make the separate disclosure item mandatory (the comment letter did not concern the registration statement at issue in the case).

However, similar claims asserted under Exchange Act Section 10(b) failed because Supreme Court precedent barred suit over the failure to make mandated disclosures and because a reasonable investor would not have perceived any inaccuracies. “Thus, none of Lead Plaintiff’s allegations justify departure from the rule that ‘a violation of federal securities law cannot be premised upon a company’s disclosure of accurate historical data,’” said the court.

With respect to Sarbanes-Oxley Act certifications by company executives, the court likewise held that the claimed violations were nonactionable. The court explained that the complaint failed to allege that: (1) the speaker did not hold the belief professed; (2) the supporting facts supplied were untrue; or (3) the speaker omitted information whose omission makes the statement misleading to a reasonable investor (citing a Second Circuit opinion in which the Supreme Court denied certiorari).

Control persons. The court noted that primary violations under the Securities Act were pleaded against multiple individuals, but that only three company executives had the requisite control needed to establish a controlling persons claim under the Securities Act. With respect to the Exchange Act claim, however, the absence of an adequately pleaded primary violation eliminated the possibility of any viable controlling persons claims under the Exchange Act.

What’s left of the case. The one Securities Act claim and the related controlling persons claims may move forward. However, the court struck a more nuanced tone regarding several other of the plaintiffs’ claims. As a result, further amendment would not be allowed regarding Securities Act and Exchange Act claims pertaining to an offering circular and certain aggregated costs disclosures. But the plaintiff may file an amended complaint to address the SOX certifications and Securities Act controlling persons claims against four other individual defendants. The court reasoned that the defendant and the court had not previously mulled pleading deficiencies regarding these claims and, thus, the plaintiffs should be afforded at least one more opportunity to cure any pleading defects.

The case is No. 1:24-cv-07837-GHW.

Judge: Woods, G.

Attorneys: Joseph Alexander Hood, II (Pomerantz LLP) for Qiao Shiyao. James Michael Lopiano (Pomerantz LLP) for Yunfan Fan. Richard Joseph Lamar Lomuscio (Stinson LLP) for Xiao-I Corp.

Companies: Xiao-I Corporation

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