Alibaba Shares Tumble After Fraud Leads to CEO Departure
Alibaba Cut Morgan Stanley, Mizuho Fraud, CEO Resignation
Qilai Shen/Bloomberg
Alibaba.com Ltd. had its stock rating cut at Morgan Stanley and Mizuho Financial Group Inc. after China’s biggest online-commerce site found more than 2,000 fraudulent vendors, leading its chief executive officer to quit.
Alibaba.com Ltd. had its stock rating cut at Morgan Stanley and Mizuho Financial Group Inc. after China’s biggest online-commerce site found more than 2,000 fraudulent vendors, leading its chief executive officer to quit. Photographer: Qilai Shen/Bloomberg
Alibaba Shares Tumble After Fraud Leads to CEO Departure
Qilai Shen/Bloomberg
Alibaba.com CEO David Wei, seen here, and Chief Operating Officer Elvis Lee, who weren’t accused of wrongdoing, resigned to take responsibility for the "systemic breakdown" of integrity, the company said.
Alibaba.com CEO David Wei, seen here, and Chief Operating Officer Elvis Lee, who weren’t accused of wrongdoing, resigned to take responsibility for the "systemic breakdown" of integrity, the company said. Photographer: Qilai Shen/Bloomberg
Alibaba.com Ltd. fell the most in more than a year after the company said an internal probe found more than 2,300 vendors used its website to defraud global buyers, prompting the chief executive officer to quit.
Some Alibaba employees were responsible for letting sellers create bogus storefronts, China’s biggest electronic-commerce company said yesterday. CEO David Wei and Chief Operating Officer Elvis Lee, who weren’t accused of wrongdoing, resigned to take responsibility for the “systemic breakdown” of integrity, it said.
Alibaba, controlled by billionaire Jack Ma, lost $933 million in market value in Hong Kong trading on concern the frauds and management shakeup will erode customer confidence and sales. Analysts at Morgan Stanley, Mizuho Financial Group Inc. and Mirae Asset Securities Co. cut their investment ratings on the company, which matches Chinese suppliers with global companies such as Wal-Mart Stores Inc. and Procter & Gamble Co.
“For Alibaba, the reputation of their website and service is all-important,” said Jake Li, who rates the stock “neutral” at Guotai Junan Securities in Shenzhen. “The scale of the problem doesn’t seem to merit such a high-level reshuffle, but Alibaba is taking quite decisive action to shore up the confidence of its users.”
Yahoo Slumps Too
The flagship unit of Alibaba Group Holding Ltd., which counts Yahoo! Inc. as its biggest shareholder, tumbled 8.6 percent, the most since Sept. 15, 2009, to HK$15.24. Alibaba provides a marketplace for customers to trade everything from organic fruits to personal computers.
Yahoo, owner of the largest U.S. portal, fell 4.3 percent to $16.91 at 4 p.m. New York time on the Nasdaq Stock Market. Yahoo owns about 40 percent of Alibaba Group, which has an estimated value of $20 billion to $40 billion, said Ben Schachter, an analyst at Macquarie Capital in New York.
“This came out of the blue and was such a shock,” said Schachter, who rates Yahoo “neutral” and doesn’t own it. “It’s a reminder that there’s a lot of uncertainty with Chinese companies.”
The frauds typically involved vendors offering small quantities of electronics at attractive prices, with payments settled using “less reliable” methods, Alibaba spokesman John Spelich said. The company created a fund in 2009 to compensate buyers who were defrauded, he said.
Customer Impact
Executive changes at the company may slow customer additions, Richard Ji, an analyst at Morgan Stanley, said in a report today. The bank cut its investment recommendation for Alibaba’s stock to “equal-weight” from “overweight.” Mizuho lowered its rating to “hold” from “buy.”
Jonathan Lu, who heads the Taobao.com online retailing affiliate, was named Wei’s replacement.
Lu, 41, joined Alibaba in 2000 and led the team that formed Alipay, an online payment service, in 2004, according to the company. Lu, who holds a master’s degree in business administration from China Europe International Business School, served as Alipay’s president before moving to Taobao in 2008.
The frauds, noticed by senior management from late 2009, won’t have a “material financial impact” and the value of the average claim was below $1,200, Alibaba said. The company found 1,219 of its “gold” suppliers in 2009 and 1,107 in 2010 engaged in fraud, according to the statement.
‘Fraudulent Storefronts’
The investigation found that about 100 of the company’s 5,000 salespeople, as well as some supervisors and managers, were either intentionally or negligently allowing the vendors to evade the company’s authentication and verification measures to form “fraudulent storefronts” for international customers.
The fraudulent vendors represented about 1.1 percent of the company’s “China Gold Supplier” subscribers in 2009 and 0.8 percent in 2010, the company said. Alibaba has terminated all of the fraudulent storefronts, it said.
“Although the management claimed that there is no material impact to company financials, we are concerned that the clean-up of fraudulent accounts puts near-term revenue growth under pressure,” Muzhi Li, a Hong Kong-based analyst at Mizuho, wrote in a note today. “We believe the company could benefit from this shake-up in the longer term.”
To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net
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