Alibaba goes back to court over IPO defrauding claims

Chinese e-commerce giant Alibaba will be heading back to court in the US on claims it defrauded shareholders by withholding information related to a regulatory warning over counterfeits on its platforms.

The news follows a US appeals court ruling that decided a “lower court judge erred in dismissing claims” against the online marketplace, executive chairman Jack Ma and others, Reuters reported.

The case relates to circumstances around Alibaba’s $25bn initial public offering (IPO) in 2014. Two months prior to the IPO, the e-retailer had a meeting with China’s State Administration for Industry and Commerce (SAIC), which threatened Alibaba with massive fines if it didn’t crackdown on the counterfeits on its platforms.

In January 2015, the SAIC then made public its concerns about the level of banned, fake and trademark infringing goods on Alibaba’s platforms, claiming less than 40% of the goods sold on the Taobao platform were genuine. The position resulted in Alibaba’s American Depositary Shares falling steeply.

According to Alibaba shareholders in their lawsuit against the firm, Alibaba allegedly concealed the meeting with SAIC and its outcome from them and intended to defraud them.

But in June 2016, the US District Court in Manhattan dismissed these claims with the conclusion that Alibaba had been transparent in its IPO material regarding all regulatory risks.

This led to an appeal, which recognised that the plaintiffs had a case against Alibaba, although it did not rule on the merits of this.

According to Reuters, the appeals court called the SAIC threat “highly material” to investors because it “required Alibaba to choose between giving up an important source of its revenue or risking enormous fines” – outcomes that could have affected the IPO’s success.

“Given the eventual market reaction to revelation of the information that was concealed at the time of the IPO, its revelation would likely have had a multi-billion-dollar negative effect,” Reuters reported the appeals court as saying, with the case sent back to the district court.

Alibaba said in a statement it was disappointed by the decision and emphasised that no conclusion had been made that it had violated US securities law. “We believe our behaviour was entirely appropriate, and we intend to defend ourselves vigorously as this litigation progresses.”

Alibaba has faced mounting criticisms in recent years over the persistence of fakes on its platforms, but it has been taking steps to crackdown on counterfeits. This year alone the marketplace has introduced a more streamlined process for takedown requests and formed the Alibaba Anti-Counterfeiting Alliance with 30 brands. In October it announced it was banning the listing of car airbag components on its platform to prevent the sale of counterfeits.