A securities class action suit was recently filed on the behalf of Alibaba Group Holding Limited shareholders. Alibaba is a China-based e-commerce giant. Using its online platform, the company provides business-to-business, business-to-consumer and consumer-to-consumer sales. By using the company’s offerings, individuals and companies can buy and sell wholesale and retail items, as well as services.
Robbins Geller Rudman & Dowd LLP announced Jan. 30, 2015, that it had brought forth a lawsuit to represent purchasers of the company’s American Depositary Shares between Oct. 21, 2014, and Jan. 28, 2015. These dates represent the class period. By filing the lawsuit, the plaintiff wishes to recover damages on behalf of all investors who bought the company’s ADSs during the class period.
Securities class action suit allegations
The legal action, which was filed in the U.S. District Court for the Southern District of New York, alleged that during the class period, Alibaba, as well as specific directors and officers, provided materially false and misleading statements about the Chinese e-commerce giant’s financial opportunities and the resiliency of its operations, and also concealed that it was the target of regulatory scrutiny. As a result of these actions, the lawsuit claimed the defendants breached the Securities Exchange Act of 1934.
In terms of specific allegations, the securities class action suit claimed that the company failed to reveal that in July 2014, two months before holding its initial public offering, Alibaba executives met with China’s State Administration of Industry and Commerce, at which point regulatory officials mentioned the Chinese e-commerce giant was engaging in business practices that were questionable in nature and even illegal.
SAIC stated that it had tested goods sold through the e-commerce giant’s website, and that more than 60 percent of them were not authentic, state media reported. Alibaba responded to this announcement, saying that it was partial in nature. According to the suit, these illegal actions included merchants providing Alibaba employees with payoffs in order to place higher in search rankings and therefore get advertising space, Bloomberg reported. In addition, vendors allegedly sold counterfeit goods – including alcohol, cigarettes, restricted weapons and branded handbags – through the company’s platform.
Alibaba IPO
In preparation for its initial public offering, Alibaba filed a prospectus with U.S. authorities, in which it said that while it had conducted due diligence to identify counterfeit products, selling these items through its platforms could harm the company’s reputation and result in legal action, according to The Wall Street Journal. The Chinese e-commerce giant did not speak to the discussions it had with SAIC officials in July.
When Alibaba held its IPO, the business, along with specific shareholders – which included co-founders Jack Ma and Joseph Tsai – sold more than 368 million ADSs for a price of $68 apiece, according to the lawsuit.
Further, the legal action alleged that during the class period, the aforementioned securities followed an upward trend, whereby they traded at artificially high prices and eventually hit $120 each in intraday trading Nov. 13, 2014. That same month, Alibaba raised $8 billion by selling debt securities.
SAIC whitepaper
According to the securities class action suit, several media outlets reported Jan. 28, 2015, that SAIC had issued a whitepaper claiming Alibaba had participated in the illegal activities that it had mentioned when speaking with company executives in July 2014. According to the legal claim, this news caused Alibaba ADSs to decline amid unusually high trading volume.
“This news caused Alibaba ADSs to decline amid unusually high trading volume.”
When explaining the lackluster performance, the company cited its failure to monetize the rising number of transactions on its mobile platforms, which yield less profitable advertising than personal computers.
Quarterly results
Before the market opened on Jan. 29, 2015, Alibaba released its financial results for the quarter ending Dec. 31, 2014. The figures showed a 28 percent year-over-year decline in profits. In addition, revenue growth fell short of the amount the defendants had lead the investment community to expect.
Falling shares
According to the lawsuit, the markets reacted to this information by pushing Alibaba ADSs lower. Between this decline and the one that followed the release of the SAIC whitepaper, the company’s market capitalization fell more than $11 billion from its class period high. As a result of this drop, Ma’s personal holdings dropped $1.4 billion, according to Bloomberg.
Company’s response to lawsuit
A spokesman for the company replied after the lawsuit was filed, maintaining the e-commerce firm’s innocence in an emailed statement, the media outlet reported.
“Alibaba believes that the claims asserted in the recently filed litigation are without merit and intends to defend itself vigorously,” the individual said, according to the news source.
Alibaba Co-founder Jack Ma lost $1.4 billion when the company’s stock declined.
What shareholders should know
Robbins Geller indicated that if eligible investors wish to serve as lead plaintiff in the securities class action suit, they have no later than 60 days following the release of the statement to move the court. Any member of the putative class can pick counsel of their choice and then move the court through that attorney, or alternatively opt to take no action and be an absent class member.