Upstart Holdings (UPST) told investors its newest AI model, Model 22, was improving approvals and supporting growth. But the complaint alleges the model overreacted to negative macroeconomic signals, became too conservative, and reduced borrower approvals and conversion rates.
Claim 55% Off TipRanks
New trading tool for UPST bullsInvestors who bought Upstart Holdings shares during the class period are now weighing their options after a federal securities lawsuit alleged that the company overstated the reliability of its AI lending model and that certain executives sold company stock during the class period.
A complaint filed April 7, 2026, in the U.S. District Court for the Northern District of California alleges that Upstart and four of its top executives made materially false and misleading statements about the performance of the company’s AI underwriting model, known as “Model 22,” throughout a class period spanning May 14, 2025, to November 4, 2025. When the alleged truth began to surface in early November 2025, Upstart’s stock fell $4.49 per share, or 9.71%, closing at $41.75 on November 5, 2025.
If you purchased Upstart securities during the class period and suffered losses, you may wish to learn more about your legal options.
Upstart’s AI-Driven Lending Business and the Rise of Model 22
Upstart Holdings, Inc. is a Delaware corporation headquartered in San Mateo, California, whose common stock trades on the Nasdaq Global Select Market under the ticker symbol “UPST.” The company, together with its subsidiaries, operates a cloud-based AI lending platform in the United States. Its product offerings include unsecured personal loans, small-dollar loans, auto refinance, auto retail loans, auto secured personal loans, and home equity lines of credit.
Upstart’s core proposition, as described in the complaint, is that its proprietary AI models can more accurately quantify a loan’s risk through a process the company calls “risk separation.” The company claims that this differentiated underwriting approach leads to higher loan approval rates, lower interest rates for borrowers, and more predictable returns for its capital partners, including banks, credit unions, and institutional investors. In early May 2025, Upstart launched “Model 22,” the latest iteration of its AI underwriting system, which defendants subsequently promoted as a meaningful driver of revenue growth and business momentum.
Allegations That Model 22’s Flaws Were Hidden From Investors
At the center of this lawsuit is the allegation that Upstart’s executives knew or recklessly disregarded that Model 22 had a significant flaw: it allegedly overreacted to negative macroeconomic signals when performing its risk-separation processes, causing it to become overly conservative in approving loans. According to the complaint, this conservatism was suppressing borrower approvals and conversion rates, directly and negatively impacting Upstart’s revenue and rendering the company’s full-year 2025 revenue guidance unreliable.
The complaint alleges that, rather than disclosing these issues, defendants continued to tout Model 22 as an accuracy-enhancing breakthrough, raising financial guidance multiple times and attributing positive results to the model’s capabilities. Plaintiff contends that this created a materially false picture of the company’s business health for investors trading Upstart securities during the class period.
If you followed Upstart during the class period, you can learn more about how to stay informed on this case as it develops.
What Upstart Executives Said About Model 22 Before the Disclosure
Throughout the class period, the company’s senior leadership repeatedly credited Model 22 as the primary engine of Upstart’s growth and financial improvement. At Upstart’s inaugural “AI Day” investor event on May 14, 2025, the complaint alleges that CEO Dave Girouard outlined what he described as a $1 trillion opportunity in credit markets, while co-founder and CTO Paul Gu touted Model 22’s use of neural networks at every layer of the model architecture, claiming it increased the company’s separation accuracy advantage over traditional credit models by 17 percentage points. CFO Sanjay Datta and CMO Chantal Rapport also presented at the event, with Datta pointing to future revenue streams enabled by the platform’s financial profile and Rapport positioning Upstart as a “category of one” business.
In August 2025, during an earnings call discussing second-quarter results, Girouard stated that the company’s growth “was primarily on the back of model improvements” from Model 22, which had helped drive conversion rates from 19% in Q1 to 24% in Q2. Datta credited Model 22 with contributing to a 58% contribution margin in Q2, up three percentage points from the prior quarter. Contemporaneously, Girouard and Datta signed Sarbanes-Oxley certifications affirming that the company’s Q2 2025 quarterly report did not contain any untrue statements of material fact.
How the Alleged Corrective Disclosure Emerged
On November 4, 2025, after market hours, Upstart issued a press release reporting its third quarter 2025 financial results. The company reported Q3 revenue of $277 million, missing its own previously issued Q3 guidance of approximately $280 million and falling short of consensus analyst estimates by $2.62 million. Upstart also guided for only $288 million in Q4 2025 revenue, well below consensus estimates of approximately $303.7 million, and reduced its full-year 2025 revenue guidance to approximately $1.035 billion from its prior guidance of $1.055 billion. The company also cut its anticipated full-year fee revenue to approximately $946 million from $990 million previously.
On the same evening’s earnings call, defendants attributed the shortfall directly to Model 22. Girouard acknowledged the model had taken “a step towards conservatism” based on macroeconomic signals and that it had been “maybe overreacting.” Gu went further, acknowledging that defendants had “knowingly” made the model “more conservative on the credit side in earlier parts of the quarter,” and that the model was “a little overly responsive to the latest changes” and subject to “measurement error.” Datta confirmed that the model’s impact would continue to weigh on Q4 results. Upstart’s stock fell $4.49 per share, or 9.71%, on November 5, 2025, following these disclosures.
Why This Alleged Misconduct Is Relevant to Shareholders
This lawsuit centers on what the plaintiff alleges was a gap between what Upstart’s leadership told investors and what they knew about Model 22’s actual performance. Investors who purchased Upstart shares during the class period between May 14, 2025, and November 4, 2025, did so against a backdrop of repeatedly raised revenue guidance and consistent praise for Model 22’s capabilities, all of which, according to the complaint, painted a misleadingly optimistic picture.
The complaint further alleges that three of the individual defendants sold significant amounts of Upstart stock during the class period while maintaining this positive narrative: Girouard sold 208,335 shares for proceeds of over $13.5 million; Datta sold 26,985 shares for over $1.4 million; and Gu sold 5,000 shares for over $344,000. Shareholders who acquired Upstart securities at prices allegedly inflated by these misrepresentations and suffered losses when the alleged truth emerged may have claims worth evaluating.
The Legal Claims Asserted Against Upstart and Its Officers
The complaint brings two counts under the Securities Exchange Act of 1934. Count I alleges violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against all defendants, asserting that they knowingly or recklessly made materially false and misleading statements and omissions that artificially inflated Upstart’s stock price during the class period. Count II alleges violations of Section 20(a) against the individual defendants, Girouard, Datta, Gu, and Rapport, on the basis that, as senior officers and directors who controlled the company’s public statements, they are liable as controlling persons for the underlying violations.
The plaintiff also alleges that Upstart violated Item 303 of SEC Regulation S-K by failing to disclose known trends or uncertainties, specifically Model 22’s tendency to overreact to macroeconomic signals, that were reasonably likely to have a material, unfavorable impact on the company’s revenues.
If you purchased Upstart securities during the class period and want to understand your rights, you may wish to consult with a securities attorney.
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