SEC Looks Into Alibaba: Chinese E-Commerce Website Faces Scrutiny From U.S. Authorities

Alibaba Group Holding Ltd. is being investigated by the U.S. Securities and Exchange Commission over its accounting methods and whether it violated federal laws.

Federal regulators are currently investigating the Chinese e-commerce giant, looking for potential violations of securities laws. The company is cooperating with the SEC probe, providing the requested documents and information to the SEC regarding data reports from Alibaba’s sales on Singles’ Day – Nov. 11 – which is China’s equivalent of Black Friday. Singles’ Day is Alibaba’s biggest shopping day of the year, with an estimated 90 billion yuan ($13.7 billion) worth of sales in the span of 24 hours last year.

“The SEC advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred,” the company said, according to Bloomberg. “This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.”

The SEC asked Alibaba to provide documentation of its accounting for its delivery affiliate Cainiao Network, its operating data for Singles’ Day, and related party transactions. In response to the announcement, the company’s market shares dipped almost 7 percent to $75.59 at 4 p.m. in trading Wednesday in New York.

“Earlier this year, the SEC informed us that it was initiating an investigation into whether there have been any violations of the federal securities laws,” Alibaba said in a public filing on Tuesday, according to USA Today.

The federal investigation remains ongoing and the focus is not immediately clear. However, analysts have raised concerns over the amount of counterfeit goods available for sale on the site, and critics have complained about Alibaba’s reporting of Singles’ Day sales in gross merchandise volume, or GMV, according to CNN Money.

“GMV tallies the monetary value of buying activity over a certain period of time, but it doesn’t take into account various hiccups — for example, customer returns, or if the seller runs out of stock and can’t deliver the product. Last year, the Hangzhou-based firm reported GMV sales of $14.3 billion on Singles’ Day. The other focus of the SEC’s probe is Cainiao Network, a logistics and distribution platform that handles the vast majority of Alibaba’s deliveries. Alibaba owns a 47% stake in the firm, which recently raised 10 billion yuan ($1.5 billion) from investors.”

How Alibaba accounts for the financial performance of its affiliates like Cainiao Network has faced criticism from investors and analysts. In particular, lack of transparency and financial information on its affiliate companies, including Cainiao deliveries and the company’s fulfillment provider have drawn investor complaints. Alibaba doesn’t count Cainiao Network or other affiliates as part of its own results, even though Cainiao president Judy Tong sits on Alibaba’s influential partnership committee. This makes it difficult for investors to judge the e-commerce company’s true performance.

The company has also faced accusations of not doing enough to address the problem of sales of fake items and “phantom goods,” according to USA Today.

“Alibaba acknowledged it has had problems with the sale of counterfeits on its site and also with ‘brushing,’ which it attributed to independent sellers who sold phantom goods to raise their rankings on the site, as sellers with more sales are more highly ranked.”

Alibaba has stated they take a more practical approach to the logistics side of their business, preferring to work with local delivery companies instead of directly owning trucks and hiring their own delivery personnel. Since each local delivery company operates as a franchise, this can make gathering information on the business difficult.

The SEC has recently stepped up efforts to investigate accounting methods, including establishing a new enforcement division specializing in accounting fraud.

[Photo by Guang Niu/Getty Images]