Tuesday, February 22, 2011

ALIBABA SHARES PLUNGES!

From Bloomberg:

  • Alibaba Shares Plunge After Chief Executive Officer, COO Quit Amid Fraud

    Alibaba.com Ltd. shares 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 allowing sellers to 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, slumped as much as 9.6 percent 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.”

    The flagship unit of Alibaba Group Holding Ltd., which counts Yahoo! Inc. as its biggest shareholder, traded at HK$15.32, down 8.2 percent, at the midday break in Hong Kong.

    ‘Attractive Prices’
    The frauds would typically involve 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.

    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.

    ‘Gold’ Suppliers

    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.

    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.”