Alibaba faces class-action lawsuit: Investor claims company failed to disclose illegal business practices

A class action lawsuit was filed Monday alleging Alibaba, along with senior executives and dozens of American as well as international financial service companies, failed to adequately warn investors when the Chinese company released its initial public offering in September 2014 — the well-publicized stock that initially showed great promise raising $25 billion for the company before plummeting 50 percent nearly a year later.

As of Tuesday evening, shares listed under the ticker symbol BABA closed at $63.92 — down from a high of nearly $120 and its initial public offering at $68.

Alibaba allegedly failed to disclose illegal business practices that were taking place on its third-party online marketplace platform, according to the class action suit filed by the law firm Robbins Geller Rudman & Dowd LLP on behalf of California investor Gary Buelow.

The company was warned just two months before its touted U.S. IPO by Chinese officials that it was engaged in illegal behaviors such as allowing rampant sale of counterfeit goods, restricted weapons sold on its platform, staffers taking bribes and ignoring that some of its vendors faked transactions to make sales appear higher, according to the suit.

A spokesman said the company was reviewing the lawsuit and “Alibaba believes that the claims asserted in the recently filed litigation are without merit and intends to defend itself vigorously,”

However, according to the suit, issues surrounding the sale of counterfeit goods on Alibaba’s site Taobao were well documented by China’s State Administration for Industry and Commerce, or SAIC, in a report that should have been disclosed to the U.S. Securities Exchange Commission.

Knockoffs of brand-name merchandise allegedly sold through the e-commerce company’s Taobao have also incited recent complaints across the country.

On Monday, the U.S. trade group American Apparel & Footwear Association called for authorities to intervene. The AAFA urged Taobao be placed on the Office of the U.S. Trade Representative’s “Notorious Markets” list — defined as marketplaces that facilitate substantial copyright piracy and trademark counterfeiting, according to an AAFA press release.

“In the 2013 and 2014 reports, USTR continued to urge Taobao and Alibaba to work with the apparel and footwear industry … our concerns have not been addressed. Counterfeits remain rampant on Taobao and are often found on other Alibaba sites,” according to the AAFA release, which noted Taobao was previously deemed a notorious marketplace until 2012.

In May, the parent company of luxury brands like Gucci also filed a federal lawsuit in New York alleging Alibaba facilitated and encouraged the sale of counterfeit products — the publicity of which preceded significant drops in the company’s stock value, according to the suit.

The California class action lawsuit cites several media and regulatory reports such as the SAIC concluding nearly 63 percent of a sampling of products sold on Taobao and other e-commerce platforms were counterfeit; as well as Alibaba’s Vice President Yu Weimin allegedly telling Chinese media in 2013 that about 17 percent of the merchants on Taobao had faked 500 million transactions worth nearly $16 billion — a practice called “brushing” whereby fake customers are created to inflate sales.

Based on the report from China’s own commerce regulators and following coverage of the alleged illegal business practices, the California lawsuit claims investors like Buelow and others weren’t given fair warning of the risks before purchasing Alibaba stock.

Alibaba’s Sept. 19, 2014, IPO at $68 per share was extremely lucrative for the company having raised $25 billion.

“When the truth of defendants’ misrepresentations and omissions became known the price of Alibaba shares suffered sharp declines,” according to the suit. “By September 24, 2015, Alibaba shares traded below $60 per share, a decline of over 50 percent from the $120 per share high. All told, investor suffered billions of dollars in losses.”

In August, Alibaba announced it would buy back up to $4 billion worth of U.S. stock shares over the next two years after the company reported its slowest quarterly revenue growth in years.

The suit further alleges Alibaba violated the U.S. Securities Act by not disclosing issues prior to its IPO — including the investigation by Chinese regulators the SAIC, which was threatening to fine the company 1 percent of daily sales if it didn’t strengthen its policies to prevent illegal activities.

“Alibaba was then already the subject of administrative law enforcement action for … facilitating the rampant sale of counterfeit goods and restricted or illegal weapons, accepting bribes from merchants in exchange for improved search rankings and advertising results, consciously disregarding fake transactions and thereby allowing the false inflation reported sales and volume, and obviously anticompetitive behavior such as forbidding merchants from participating in rival platform promotions, all of which created imminent and material risk to its business operations, and which likely would have a material effect on its revenue, income and share price,” according to the suit.

The Buelow lawsuit, which could be amended should other investors join as plaintiffs, is scheduled for a complex case status conference in San Mateo County Superior Court in December. An attorney representing Buelow said he wouldn’t comment on pending litigation.

samantha@smdailyjournal.com

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