Henry RiversFriday, Jun 20, 2025 11:18 pm ET

63min read

The Securities and Exchange Commission (SEC) has escalated its scrutiny of fraud in high-growth sectors like biotechnology and artificial intelligence, sending shockwaves through markets. Recent enforcement actions—from $40 million penalties for overstated AI claims to CEO bars for hiding FDA regulatory setbacks—reveal a pattern of aggressive tactics by regulators to curb misleading practices. For investors chasing the next big thing in these sectors, recognizing red flags is now critical to avoiding costly mistakes.

Biotech companies often hinge their valuations on the promise of breakthrough therapies. But when a company downplays or omits material FDA feedback, it's a red flag. Take , which raised $40 million in a stock offering while failing to disclose that the FDA had placed two cancer drug programs on clinical hold. The SEC's subsequent action highlighted how companies might obscure regulatory roadblocks.

The stock plummeted 80% after the SEC's 2024 enforcement action, underscoring the risk of regulatory missteps.

Scrutinize FDA correspondence in SEC filings. If a company's press releases about regulatory progress lack specifics (e.g., citing “FDA comments” without details), proceed with caution.

Pre-revenue biotech and AI firms often rely on bold projections to attract investors. But when those forecasts are built on shaky assumptions, disaster looms. , for instance, claimed a $1 billion market opportunity for its Hyaline display film based on flawed calculations. The SEC later revealed the company had concealed technical flaws in the product.

Zymergen's stock collapsed alongside its credibility, while broader biotech benchmarks fared better.

Demand clarity on revenue projections. Ask: Are market size estimates peer-reviewed? Does the company provide third-party validation of its claims?

Clinical trial results are the lifeblood of biotech valuations. Yet, some companies manipulate data to mislead investors. faced a $40 million penalty after unblinding Alzheimer's trial data to falsely suggest cognitive improvements. The SEC emphasized that omitting negative results—even in early-stage trials—constitutes fraud.

Cross-check trial results with public registries like
ClinicalTrials.gov. If a company's claims don't align with published data, steer clear.

The SEC's Cybersecurity and Emerging Technologies Unit (CETU) has targeted “AI washing”—when companies exaggerate their use of artificial intelligence. For example, investment firms like paid penalties for falsely claiming AI-driven trading algorithms.

NVIDIA's dominance in AI hardware contrasts with smaller players' volatility, highlighting the risks of unproven AI narratives.

Demand specifics. If a company describes its AI capabilities in vague terms (“game-changing algorithms”) without technical details or independent audits, it's a warning sign.

Growth sectors are fertile ground for innovation—and fraud. Here's how to navigate them:

The SEC's crackdown isn't slowing down. Biotech and AI stocks will remain volatile as regulators test companies' truthfulness. For investors, vigilance isn't optional—it's the price of admission. The next Cassava or Zymergen could be lurking in your portfolio.

The data shows a clear uptick in biotech cases, but AI-related actions are accelerating—a trend investors should monitor closely.

Stay skeptical, dig deep, and remember: In growth sectors, the most aggressive claims often mask the biggest risks.

Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.