AI Shopping App Founder Charged with Fraud After Alleged Human-Driven Operation Exposed
Startup’s “Cutting-Edge Algorithm” Was Reportedly Humans in a Warehouse, Prosecutors Say
NEW YORK — The founder of Silicon Valley-based AI shopping assistant app Shoppify has been indicted on federal fraud charges after prosecutors alleged the company’s “revolutionary artificial intelligence” was secretly operated by human contractors in the Philippines. The U.S. Department of Justice (DOJ) announced the charges Tuesday, accusing 34-year-old CEO Ethan Teller of misleading investors and customers about the app’s capabilities while raising $43 million in venture capital.
According to a 12-page criminal complaint unsealed in Manhattan federal court, Shoppify marketed itself as a “machine learning-powered personal shopper” that could curate clothing recommendations by analyzing users’ social media behavior, browsing history, and body measurements. Investors were told the AI could “predict trends faster than any human stylist,” with Teller claiming the technology would “render traditional e-commerce obsolete.”
But an investigation by the DOJ and FBI revealed that until at least late 2023, the majority of Shoppify’s services were manually handled by a team of over 150 workers in Manila. These contractors—paid $2.30 per hour—allegedly reviewed user profiles, selected clothing items, and even wrote personalized product descriptions that the app presented as AI-generated. Internal Slack messages cited in the complaint show Teller directing engineers to “add a 10-second delay to responses” to simulate “algorithmic processing.”
“This was not innovation—it was old-fashioned fraud,” said U.S. Attorney Damian Williams at a press conference. “The defendant sold investors a sci-fi fantasy while running a digital sweatshop.”
Investors Duped, Users “Heartbroken”
The scheme unraveled after a whistleblower—reportedly a former operations manager—contacted the Securities and Exchange Commission (SEC) in January. The SEC’s subsequent inquiry found that Shoppify’s 2022 Series B pitch deck included fabricated technical diagrams and falsified performance metrics.
Investors expressed outrage, with venture firm Nexus Capital calling the charges “a profound betrayal.” Users, meanwhile, flooded social media with reactions ranging from amusement to dismay. “I wrote five-star reviews about how the AI ‘just gets me’… turns out it was Carlos from Manila,” tweeted one customer.
Tech Ethics Under Scrutiny
The case has reignited debates about accountability in AI-driven startups. “The pressure to hype ‘AI magic’ leads some founders to cut corners or outright lie,” said Dr. Lena Choi, a Stanford University tech ethics researcher. “When investors can’t verify technical claims, scams thrive.”
Teller, released on $1 million bond, maintains his innocence. His attorney, Mara Goldstein, argued the human contractors were “training data annotators” and accused prosecutors of “criminalizing startup pivots.” If convicted of wire fraud and securities fraud, Teller faces up to 20 years in prison.
The DOJ urges affected investors or users to contact its hotline. Meanwhile, Shoppify’s app remains offline, its once-buzzy social media accounts now filled with angry emojis and demands for refunds.
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