What happened
On 13-14 October 2026, New York AG Letitia James and a bipartisan coalition of 39 other attorneys general (including Massachusetts AG Andrea Joy Campbell, who issued her own 14 October press release) filed a notice in the bankruptcy of Character Technologies, Inc. (Character.AI, ~20M monthly users, 2M+ accounts self-declared under 18). A multi-state investigation found chatbots posing as licensed professionals, exposing children to sexually explicit/violent/self-harm content (independent testing cited 669 harmful interactions in 50 hours with accounts for ages 12-15), and the platform collecting highly sensitive data (private chats, voice calls, mental-health disclosures) used for revenue and AI training. The coalition asks the court, company, and any buyer to condition any sale on effective age verification beyond self-disclosure, safeguards against sexual/violent/harmful content, suicide/self-harm response, removal of fake 'licensed professional' chatbots, a comprehensive privacy program, opt-outs from targeted advertising, limits on using private conversations for AI training, and consumer access/deletion before any sale.
Why it matters
First major multi-state enforcement intervention in an AI company's insolvency: it establishes that conversational AI/user data is a sensitive asset that cannot be freely transferred to a new owner, and that states will use consumer-protection, privacy, and bankruptcy processes to impose substantive AI-safety conditions on distressed AI companies. It is precedent for any acquisition of consumer-AI businesses holding children's and users' data, reinforces the wider multi-state AI-enforcement posture (OpenAI subpoenas, FTC Section 5 probe), and signals heightened diligence expectations across the companion-AI sector.
Action needed
AI firms holding large volumes of personal/frontier conversational data (especially minors' data) should review bankruptcy/change-of-control provisions, data-transfer and AI-training consent terms, and child-safety controls ahead of any M&A or distressed-sale scenario; buyers of consumer-AI assets should expect AG-imposed conditions similar to those requested here.