LONDON, June 5 (Reuters) - Last Christmas Eve,

NewsBreak, a free app with roots in China that is the most

downloaded news app in the United States, published an alarming

piece about a small town shooting. It was headlined "Christmas

Day Tragedy Strikes Bridgeton, New Jersey Amid Rising Gun

Violence in Small Towns."

The problem was, no such shooting took place. The Bridgeton,

New Jersey police department posted a statement on Facebook on

December 27 dismissing the article - produced using AI

technology - as "entirely false".

"Nothing even similar to this story occurred on or around

Christmas, or even in recent memory for the area they

described," the post said. "It seems this 'news' outlet's AI

writes fiction they have no problem publishing to readers."

NewsBreak, which is headquartered in Mountain View,

California and has offices in Beijing and Shanghai, told Reuters

it removed the article on December 28, four days after

publication.

The company said "the inaccurate information originated from

the content source," and provided a link to the website, adding:

"When NewsBreak identifies any inaccurate content or any

violation of our community standards, we take prompt action to

remove that content."

The operators of the website, findplace.xyz, did not respond

to a request from Reuters for comment. The police declined to

provide further comment.

As local news outlets across America have shuttered in

recent years, NewsBreak has filled the void.

Billing itself as "the go-to source for all things local,"

Newsbreak says it has over 50 million monthly users. It

publishes licensed content from major media outlets, including

Reuters, Fox, AP and CNN as well as some information obtained by

scraping the internet for local news or press releases which it

rewrites with the help of AI. It is only available in the U.S.

But in at least 40 instances since 2021, the app's use of

AI tools affected the communities it strives to serve, with

Newsbreak publishing erroneous stories; creating 10 stories from

local news sites under fictitious bylines; and lifting content

from its competitors, according to a Reuters review of

previously unreported court documents related to copyright

infringement, cease-and-desist emails and a 2022 company memo

registering concerns about "AI-generated stories."

Reuters spoke to seven former NewsBreak employees, including

five who said most of the engineering work behind the app's

algorithm is carried out in its China-based offices. The former

employees requested anonymity, citing confidentiality agreements

with NewsBreak.

Two local community programmes assisting disadvantaged

people told Reuters they were impacted by erroneous stories

produced by NewsBreak's AI.

On three occasions in January, February and March, Food to

Power, a Colorado-based food bank said it had to turn people

away because NewsBreak stated incorrect times of food

distributions. The charity complained to NewsBreak in a January

30 email to NewsBreak's general customer support email address,

which Reuters has reviewed. The charity said it received no

response.

Harvest912, a charity in Erie, Pennsylvania emailed

NewsBreak about two inaccurate, AI-based news stories which said

it was holding a 24-hour foot-care clinic for homeless people,

asking the outlet to "cease and desist" erroneous coverage.

"You are doing HARM by publishing this misinformation -

homeless people will walk to these venues to attend a clinic

that is not happening," Harvest912 told NewsBreak, in a January

12 email seen by Reuters.

In response to Reuters' questions, NewsBreak said it removed

all five articles about the charities after learning they were

erroneous and that the articles were based on incorrect

information on some of the charities' web pages.

Without providing a reason to Reuters, NewsBreak added a

disclaimer to its homepage in early March, warning that its

content "may not always be error-free".

Newsbreak generates revenue by showing ads to its users, who

are predominantly female, above the age of 45, without college

degrees, and live in suburban or rural parts of the U.S.,

according to the seven former employees and a 2021 company

presentation reviewed by Reuters.

The company launched in the U.S. in 2015 as a subsidiary of

Yidian, a Chinese news aggregation app. Both companies were

founded by Jeff Zheng, the CEO of Newsbreak, and the companies

share a U.S. patent registered in 2015 for an "Interest Engine"

algorithm, which recommends news content based on a user's

interests and location.

NewsBreak told Reuters that the patent was assigned by Zheng

to both companies because "some of the concepts were developed

from Jeff's time at Yidian" and that NewsBreak is "U.S.-based"

and "U.S.-invested". The shared patent has "absolutely no

bearing on the company and its operations", NewsBreak said in

written responses to Reuters, describing the technology

referenced in the patent as "outdated".

COMPANY MEMO

A May 2022 company memo from a NewsBreak consultant to

Zheng, reviewed by Reuters, raised concerns about NewsBreak's

use of AI tools to re-publish stories from local news sites

under five fictitious bylines.

"I cannot think of a faster way to destroy the NewsBreak

brand," Norm Pearlstine, former Executive Editor at the Wall

Street Journal and the Los Angeles Times who was working at the

time as a consultant to NewsBreak, wrote in the memo to Zheng.

In an interview after NewsBreak gave him permission to speak

with Reuters, Pearlstine said he learned of the practice from a

NewsBreak colleague.

"I question the legality of creating fake accounts using

content publishers put behind their paywalls. If I had learned

about the practice while at the LA Times, I would have

instructed our lawyer to seek a restraining order and sue for

damages," wrote Pearlstine, whose six-month consulting role at

NewsBreak in 2022 consisted of advising the company about U.S.

editorial businesses.

Pearlstine, who confirmed the memo was authentic,

attributed the lapse to a lack of journalistic experience. "A

fair number of people on the staff were either new to journalism

or new to the U.S. market. That was part of the reason I felt I

had to be very direct and very explicit in explaining why I

thought this was important," he told Reuters.

NewsBreak said the news stories referenced in Pearlstine's

memo were a "limited experiment in three U.S. counties" to

aggregate third-party content, and that the effort was disbanded

after producing ten articles. The company denied going behind

paywalls and said it used "snippets" of articles that were

publicly visible to produce complete news stories using OpenAI.

NewsBreak also pointed Reuters towards Zheng's emailed

response to Pearlstine, saying he recognized the problem and

asked his team to fix it.

OpenAI told Reuters its policies prohibited using its

technology to mislead people.

In 2022, Patch Media, which operates digital local news

feeds in every U.S. state, reached a $1.75 million settlement in

a lawsuit against NewsBreak for copyright infringement,

according to court documents reviewed by Reuters, which alleged

that NewsBreak republished Patch's news stories without

permission or credit.

Patch did not respond to a request for comment. NewsBreak

said the settlement was not an admission of wrongdoing.

Emmerich Newspapers, which operates newspapers in

Mississippi, Arkansas and Louisiana, reached a 2021 settlement

with NewsBreak in a lawsuit alleging copyright infringement

related to NewsBreak's use of Emmerich's content without

permission. NewsBreak said the settlement was "amicable."

Another copyright lawsuit is ongoing. The two parties are

"embroiled in additional lawsuits which we are vigorously

defending against," NewsBreak said.

Wyatt Emmerich, the company's president, said the lawsuit

against NewsBreak involved "verbatim copying of content". He

added: "What worries me in the future is that news aggregators

could use artificial intelligence to slightly rewrite our

stories which would make proving copyright infringement much

more difficult. I have witnessed instances of this happening

already on news aggregation sites."

CHINA ROOTS

NewsBreak is a privately held start-up, whose primary

backers are private equity firms San Francisco-based Francisco

Partners, and Beijing-based IDG Capital, NewsBreak told Reuters.

Francisco Partners declined to answer questions about its

investment in NewsBreak. IDG did not respond to repeated emailed

requests for comment.

In February, IDG Capital was added to a list of dozens of

Chinese companies the Pentagon said were allegedly working with

Beijing's military. IDG Capital told Bloomberg in February that

it has no association with the Chinese military and does not

belong on that list. NewsBreak did not comment on the finding.

Yidian, the Chinese aggregation company, divested from

NewsBreak in 2019 because "its management team at the time did

not understand the U.S. market", Zheng said. Until then, Li Ya,

the president of Phoenix New Media ( FENG ), a Chinese state-linked media

firm which held a 46.9% stake in Yidian, had been a director at

NewsBreak, according to corporate records.

Yidian continued to describe NewsBreak as its U.S. version

on its website until 2021, according to The Wire China.

Yidian in 2017 received praise from ruling Communist Party

officials for its efficiency in disseminating government

propaganda. Reuters found no evidence that NewsBreak censored or

produced news that was favourable to the Chinese government.

A NewsBreak spokesperson said there was no ongoing

commercial relationship with Yidian. Yidian, Phoenix New Media ( FENG )

and Li Ya did not respond to requests from Reuters for comment.

About half of NewsBreak's 200 employees are China-based

where they are engaged in R&D, the company said.

A 2022 company roster reviewed by Reuters showed that 100 of

NewsBreak's 137 engineers at the time were based in China.

Five of the former NewsBreak employees said CEO Zheng

divides his time between China and the United States.

Zheng, who was born in China, is a permanent resident of

the United States and his family relocated to the U.S. early

last year, the company said.

Reuters found five job advertisements NewsBreak posted on

Chinese job sites seeking data analysts or engineers for its

Beijing and Shanghai-based offices capable of "in-depth mining"

of "massive user behaviour data" from the app's U.S. users.

A Republican aide to the U.S. House of Representatives

Foreign Affairs Committee told Reuters the use of Chinese-based

engineers by Newsbreak raised possible concerns that American

user data can be accessed in China. The aide declined to be

identified because they were not authorised to speak to the

media.

In a recent high-profile case, U.S. officials warned that

TikTok, whose parent company is the Chinese firm ByteDance,

could be compelled by the Chinese government to use its

algorithm to control what kind of news is viewed by Americans

and hand over their data.

TikTok, the most downloaded short video app globally, with

170 million U.S. users, now faces a forced sale or a U.S. ban.

In response to Reuters questions, TikTok said it was

planning to offer third parties more access to examine its code

and verify the app functions as intended.

Zheng told Reuters that NewsBreak complies with U.S. data

and privacy laws and is maintained on U.S.-based Amazon ( AMZN )

servers. "Staff in China only access anonymous data stored on

AWS servers in the U.S.," he said. Amazon ( AMZN ) declined to comment.

NewsBreak also said that as a U.S.-based business it was not

subjected to Chinese data laws.

Pearlstine, the former NewsBreak consultant, said

NewsBreak's ability to demonstrate it is a U.S. company was

critical.

"The long term health of NewsBreak was dependent on its

being perceived as a California company and that the more the

leadership was in Mountain View, the better it would be for the

company," he said.