Alibaba to face renewed lawsuit after 'concealing counterfeit warning'
The US Court of Appeals for the Second Circuit brought a case against e-commerce platform Alibaba back to life yesterday.
Brought by Alibaba shareholders, the case originated in the US District Court for the Southern District of New York.
The plaintiffs sued Alibaba and its most senior executives, including founder and executive chairman Jack Ma, alleging that Alibaba had concealed a regulatory warning when making public disclosures related to its initial public offering (IPO).
According to the complaint, in July 2014, two months before the $25 billion IPO, officials at China’s State Administration for Industry and Commerce (SAIC) summoned Alibaba to an administrative guidance meeting.
SAIC allegedly warned Alibaba that unless it ceased to host a marketplace for the sale of counterfeit goods on its website, “it would be subjected to huge repeating fines of 1% of daily gross merchandise value sold on Alibaba’s e-commerce platforms”.
According to the Second Circuit, when the material was revealed four months after the IPO, Alibaba’s stock dropped 13% in two days, erasing $33 billion in market capitalisation.
In June last year, the lower court dismissed the complaint.
“In dismissing the complaint, the district court inappropriately discredited significant allegations on which plaintiffs’ claims relied, failing to treat the complaint in the light most favourable to the plaintiffs, and to draw reasonable inferences in the plaintiffs’ favour,” said the Second Circuit.
The Second Circuit didn’t rule of the merits of the case, but found that the plaintiffs had adequately alleged Alibaba had intended to defraud them.
It added that the information was “highly material” to investors because the threat required Alibaba to “choose between giving up an important source of its revenue or risking enormous fines, where either outcome would have significant negative impact on Alibaba’s revenues and on the success of its IPO”.
The decision was vacated and the suit remanded for further proceedings.
A spokesperson for Alibaba said: "While we are obviously disappointed by the decision of the Second Circuit, this decision was based on the allegations set forth in the plaintiff’s complaint and does not represent a determination that Alibaba violated the US securities laws in any way."
They added: "We believe our behaviour was entirely appropriate, and we intend to defend ourselves vigorously as this litigation progresses.”
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