SHANGHAI — Alibaba plans to defend itself against a lawsuit claiming that the e-commerce giant made misleading statements and hid the fact it met with Chinese regulators months ago before the company’s blockbuster IPO in September.
The law firm Robbins Geller Rudman & Dowd LLP said it filed the lawsuit on Friday in Manhattan federal court against the company and some officers based on alleged violations of securities laws, according to a Bloomberg report.
“Alibaba believes that the claims asserted in the recently filed litigation are without merit and intends to defend itself vigorously,” an Alibaba company spokeswoman said.
The law firm is accusing Alibaba of failing to disclose that executives met with China’s State Administration of Industry and Commerce (SAIC) in July 2014, just two months before its initial public offering, and that regulators raised concerns about possibly illegal business practices, Bloomberg reported.
Named in the 23-page complaint as defendants are co-founder and chairman Jack Ma; co-founder and executive vice chairman Joseph Tsai; chief executive officer Jonathan Zhaoxi Lu and chief financial officer Maggie Wei Wu.
The plaintiff, Manishkumar Khunt, is seeking class-action status for the lawsuit, as well as a trial by jury, damages and interest, and attorneys’ fees. The Robbins Geller law firm is seeking other potential plaintiffs — anyone who bought Alibaba shares between Oct. 21, 2014 and Jan. 28, 2015, the stated class period — to join in the lawsuit.
On Wednesday, the SAIC released a report or “White Paper” accusing Alibaba employees of taking bribes and criticizing the company for not doing enough to crack down on he sale of counterfeit products. Just a couple days later, on Friday, Chinese regulators seemed to take a step back from their criticism of Alibaba and issued a new statement. The original White Paper was removed from SAIC’s website.
After a meeting between Alibaba founder and chairman, Jack Ma, and SAIC chief, Zhang Mao, the regulatory authority released Friday a statement on its website pledging to work together with Alibaba to “to better regulate and promote the healthy development of the online economy.” According to a transcript of a press conference posted on the SAIC website, a SAIC spokesperson said the original White Paper did “not have the force of law.”
An Alibaba spokeswoman said the second SAIC statement “speaks for itself. We feel vindicated.”
Though China’s rampant problems with counterfeit goods are no secret, this public display of animosity between one of China’s biggest companies and a government regulatory body came as a surprise to many China watchers.
Joe Simone, director of SIPS, an intellectual property consulting firm based in Hong Kong, believes the release of an initial report from SAIC, which studied the percentage of fake goods for sale on China’s major e-tailers, was more of an opportunity for the regulatory body to demonstrate that it’s committed to doing something about the proliferation of counterfeits in the Chinese online marketplace, rather than a targeted attack on Alibaba.
“In contrast to its actions against factories and retail outlets, the SAIC and its local offices have done very little to investigate and penalize traders operating online. This seems in part due to a lack of leadership. But it also results from the lack of statutory powers accorded by law to the SAIC to investigate more complex cases,” Simone said.
“I think they put [the report] out there to show they were doing something, not necessarily to slap Alibaba. Neither of them wanted to pick a public fight, but the SAIC clearly thought it important to put the information out there. ”
According to Simone, the issues raised in this latest furor are much bigger than a war of words between Alibaba and Chinese regulators, and the ramifications will be much broader. In essence, this is a battle for the future of China’s e-commerce landscape, which will be an increasingly important part of accessing the Chinese market for many brands in the years to come, he argued.
“Online sales for many brands in China used to be no more than 5 percent of total revenues. But some of our clients are reporting increases to 20 percent and beyond, and in 10 years, it’s quite possible – if not likely – that the majority of sales and profits will come from online trade. If the government and industry do not work more effectively together in crafting solutions to online counterfeiting and other types of fraud in China, the impact on companies, consumers and even the macro-economic picture will be enormous. And as platforms like Alibaba, JD and others expand globally, they will no doubt bring their cancers with them.”
Simone said that while nobody seems to have a “comprehensive solution” as of yet, “the Chinese are finally starting to understand the complexity of the situation and to deepen research and dialogue on it.”
In an interview with state-owned media published on the SAIC website last month, director Zhang Mao said that the e-commerce market’s “problems are not few” with a broad range of Chinese consumers embracing online shopping, and a growing number of them complaining about poor service and dishonest business practices.
As many as 50 thousand consumer complaints related to online shopping were received by SAIC in the first eleven months of 2014, according to Zhang.
With China’s 2014 e-commerce sales approaching $450 billion, according to Beijing-based retail firm, iResearch, SAIC is obviously under pressure to do more to regulate the fast-growing sector.
According to statistics gathered by the China Electronic Commerce Association, losses suffered by consumers buying fake and defective goods from online stores amounted to $4.7 billion in 2014.
Alibaba on Thursday said third-quarter earnings for the period ended Dec. 31 fell 28 percent to $964 million, while revenues rose 40 percent to $4.2 billion. Shares of Alibaba that day fell 8.8 percent to $89.81 in Big Board trading, although the stock is well above its initial public offering price of $68 in September. On Friday shares of Alibaba slipped again by 0.8 percent to $89.08