US law firms review Alibaba's fakes issue

Two New York-based law firms are investigating investor claims about the business practices of Alibaba Group Holding Ltd in light of a critical Chinese government report about counterfeit goods being sold on a company platform.

The Rosen Law Firm, which concentrates its practice in securities class action suits, said in a statement Thursday that it was "investigating potential securities claims"against Alibaba, China's largest e-commerce company. Rosen said it is preparing a lawsuit against Alibaba to recover shareholder losses stemming from misinformation.

Pomerantz LLP, which focuses on corporate, securities and antitrust class litigation, also said it also was looking into claims against Alibaba on behalf of investors.

The investigation will center on whether or not Alibaba and some of its officers have violated portions of the Securities Exchange Act of 1934. At issue could be whether Alibaba should have disclosed in a Securities and Exchange Commission filing that it was being investigated by the Chinese government over counterfeit goods sold through its Taobao Marketplace website (taobao.com).

The probe had started before Alibaba's record-breaking US initial public offering in September.

If any material information was not disclosed in the IPO prospectus, there could be lawsuits against Alibaba and its underwriters, according to Reena Aggarwal, a finance professor at Georgetown University.

Shares of Alibaba closed Thursday at $89.81, down $8.64, or 8.8 percent on the New York Stock Exchange. The company released fourth-quarter earnings estimates Thursday that missed analyst expectations.

Alibaba was criticized in a report by China's State Administration for Industry and Commerce (SAIC) on Wednesday that said the company is not doing enough to prevent fake goods from being sold on its websites.

The report accused Alibaba of allowing merchants to operate without required business licenses, which has given counterfeiters an avenue to peddle knock-off goods.

"Alibaba not only faces the biggest credibility crisis since its establishment, it also casts a bad influence for other Internet operators trying to operate legally,"the report said.

Alibaba bristled at the accusations, and Taobao earlier this week announced that it will file a complaint against the SAIC's Internet regulation director, Liu Hongliang, claiming that he drew inappropriate and non-objective conclusions after the investigation.

The Hangzhou-based company also said its Taobao Marketplace is improving technology and procedures to counter fakes, and that Alibaba it has created a task force of 300 to fight counterfeit goods.

Alibaba Vice-Chairman Joe Tsai, speaking on the earnings conference call Thursday, said: "We believe the flawed approach taken in the report, and the tactic of releasing a so-called 'White Paper' specifically targeting us, was so unfair that we felt compelled to take the extraordinary step of preparing a formal complaint to the SAIC.

"In the global e-commerce marketplace there will always be people who seek to conduct illicit activities, and like all global companies in our industry, we must continue to do everything we can to stop these activities,"Tsai said.

SAIC has removed the report from its website.

Alibaba said in its IPO prospectus that there have been similar allegations of counterfeit goods on its marketplaces.

In July, a lawsuit was filed against Alibaba over the presence of allegedly counterfeit goods on the company's shopping platforms. The suit, which was later withdrawn, included famous designers Gucci and Yves Saint Laurent.

The withdrawal was made "without prejudice,"which means the claims could be reinstated in the future.

Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP, told Bloomberg News that the recent incident with the SAIC would "spook investors". The Chinese government "is not backing down,"she added.

Cyrus Mewawalla, managing director of London-based CM Research, told Bloomberg News that "the scale of the revelations could leave Alibaba with substantial reputational damage. We still see several risks in this stock that may in the coming months overshadow the earnings growth."

Alibaba, which helps connects buyers and sellers alike through six online marketplaces, saw revenue climb to $4.2 billion in the quarter ended Dec 31.

The revenue figure missed Wall Street's estimate of $4.5 billion, according to a pool of analysts polled by Reuters. Alibaba's mobile revenue rose 448 percent year over year to $1.04 billion.

"The revenue increase was much lower than people expected,"You Na, a Hong Kong-based analyst at ICBC International Research Ltd told Bloomberg News. "As more merchants start advertising on its mobile apps, revenue growth could slow as ad space and the fee it charges will be lower than what they charge for on desktops."

Net profit of $957 million was down 28 percent from the same period a year ago. Alibaba cited costs related to stock awards before its listing, as well as taxes and fees.

Alibaba's combined online gross merchandise volume in the quarter increased almost 49 percent to more than $125 billion. Alibaba also recorded a year-on-year increase in the number of monthly active users from 136 million to 265 million in 2014, or 95 percent. Annual active buyers totaled 334 million, 45 percent more than in the previous year.

One of Alibaba's biggest shareholders, Yahoo Inc., on Tuesday announced a tax-free spinoff of its $40 billion stake. The deal will put Yahoo's 384 million shares into a newly registered firm called SpinCo.