Lawsuit: Alibaba Hid Regulatory Investigation Before IPO

First it was Chinese authorities investigating Alibaba for letting fake and substandard goods be sold through its online marketplaces. Then the Securities and Exchange Commission wanted to know why Alibaba didn’t reveal that investigation before its record-setting, $25 billion IPO last September. Now — with Alibaba’s stock down more than 16 percent since the start of 2015 — the class-action shareholder lawsuits have arrived, according to SeekingAlpha.

Actually, at least two shareholder suits were filed before the SEC inquiry surfaced in mid-February. On Feb. 2, a class-action lawsuit was filed against in U.S. District Court in Manhattan, with a shareholder named Manishkumar Khunt as the lead plaintiff. The next day, Feb. 3, a similar suit was filed in the same court by a different law firm, with investor Devorah Klein as the lead plaintiff. (That law firm is still sending out press releases looking for more lead plaintiffs, which is why some news sources mistakenly reported that another lawsuit was filed last Friday.)

Both lawsuits cover basically the same ground: On Jan. 28, Alibaba’s share price fell 4 percent after news of the Chinese counterfeit-goods investigation became public. The price dropped another 9 percent the next day after Alibaba announced quarterly earnings that missed analyst expectations, and said profits had dropped 28 percent from the year-earlier quarter because its shift to mobile transactions wasn’t as profitable as sales on PCs have been.

As with all shareholder lawsuits over a wildly gyrating stock price (Alibaba’s shares also jumped from about $85 to $120 between mid-October and mid-November, after falling from around $100 a share after the IPO), just how much of a problem the suits will be may depend on what happens during the slow process of getting to court.

Case in point: In just the three weeks since these two lawsuits were filed, the Chinese regulators that accused Alibaba essentially reversed themselves on their accusations, saying their report lacked legal force. Meanwhile, the SEC’s letter asking Alibaba for information specifically said it wasn’t accusing the company of violating the law. But on the downside, Alibaba’s share price is still sitting at about $85.