A federal judge has dismissed the operative securities complaint against Innodata Inc. (INOD) and several of its executives without prejudice, finding that the complaint failed to meet the heightened pleading standards required for fraud claims. The decision marks a significant procedural development in a case centered on the company’s statements about its artificial intelligence capabilities.
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Court Grants Motion to Dismiss
The ruling, issued on April 27, 2026, by the U.S. District Court for the District of New Jersey, granted motions to dismiss filed by Innodata and individual defendants, including CEO Jack Abuhoff, former CFO Mark Spelker, and Interim CFO Marissa Espineli. The Court dismissed the operative complaint in full without prejudice.
Because the dismissal was without prejudice, the plaintiff retains the ability to attempt to replead the claims.
What the Lawsuit Alleged
The case was brought by an investor on behalf of a proposed class of shareholders who purchased Innodata stock between May 9, 2019, and February 14, 2024. The complaint alleged that the company misrepresented the nature and extent of its artificial intelligence capabilities, describing the conduct as “AI washing.”
According to the complaint, company executives repeatedly stated in earnings calls and filings that Innodata had developed proprietary AI technologies and platforms. The plaintiff alleged that these statements were misleading because the company allegedly relied heavily on human labor rather than advanced AI systems.
The complaint also pointed to a February 2024 report by a research firm, which criticized the company’s AI claims and was followed by a decline in the company’s stock price.
Court Finds Pleading Deficiencies
The Court focused on whether the complaint satisfied the strict requirements imposed by federal securities laws, particularly under the Private Securities Litigation Reform Act.
While the Court found that the complaint adequately identified the challenged statements and the context in which they were made, it concluded that the allegations of falsity were not supported by sufficiently particularized facts.
A key issue involved reliance on statements from former employees. The Court determined that these sources were not described with enough detail to establish that they had reliable, firsthand knowledge of the company’s AI capabilities. It also found that some statements attributed to these individuals were vague, opinion-based, or internally inconsistent.
In addition, the Court declined to credit portions of the short-seller report that relied on anonymous sources without sufficient detail about their roles or access to information.
Impact on Fraud Claims
Because the complaint failed to adequately allege materially false or misleading statements, the Court concluded that the core securities fraud claim under Section 10(b) and Rule 10b-5 could not proceed.
The Court also found that the complaint did not sufficiently establish scienter, meaning a strong inference that the defendants acted with intent to deceive investors. As a result, related control-person claims under Section 20(a) were also dismissed.
What Happens Next
The dismissal without prejudice allows the plaintiff to file an amended complaint that attempts to address the deficiencies identified by the Court. If the plaintiff does not amend, the dismissal could become the operative endpoint of the case.
The ruling does not determine whether Innodata or its executives engaged in wrongdoing. Instead, it reflects the Court’s conclusion that the current allegations do not meet the legal standard required to proceed.
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