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Alibaba Group Holding Ltd (NYSE:BABA) Shareholders Balk on SEC Investigation

Alibaba (BABA)

Alibaba Group Holding Ltd  has revealed that it is currently under investigation by the U.S. Securities and Exchange Commission (SEC) over its accounting practices. SEC wants to see if such practices violate any US federal laws. The Chinese ecommerce giant has furnished the SEC with all accounting details pertaining to its logistics company Cainiao Network. Other information provided includes operating data on Singles’ Day shopping festival. This disclosure was made in its annual report that was filed on Tuesday.

Alibaba (BABA)

Singles’ Day is the world’s largest shopping festival. Sale figures usually exceed the combined sales of Cyber Monday and Black Friday festivals in the U.S.

The SEC has assured the company that the probe shouldn’t be thought as a sign that Alibaba broke federal securities laws. The company also noted in the filing that it isn’t sure when the probe will conclude.

Alibaba Sold GMV Worth $14.3bn on Singles’ Day

While it isn’t clear which aspects of Alibaba’s books the SEC will cover, the company has been criticized for reporting its Singles’ Day sales using the gross merchandise volume (GMV) basis. GMV estimates the monetary value of purchasing activity across a certain period of time. However, it fails to account for issues such as customer returns, or seller stockouts. The company said it sold $14.3 billion in GMV on Singles’ Day last year.

Some merchants have also wondered whether sellers on Alibaba place fake orders on the platform in order to boost their profile to potential buyers. If the SEC finds that the merchants knowingly inflated orders, Alibaba could be slapped with huge fines or even class action lawsuits.

Alibaba owns 47 percent of Cainiao Network shares. The company, which recently raised $1.5 billion from investors, handles most of Alibaba’s logistics. The way Alibaba reports the financial performance of Cainiao is a sticky point. The Hangzhou-based ecommerce firm listed in its annual report that Cainiao made a net loss of $94 million in 2015. Revenues stood at $472 million.

News of the SEC probe erased $14 billion in market value of the $187 billion company on Wednesday.

Unlike its major local rivals such as JD.com, Alibaba doesn’t control its own delivery, shipping or warehousing. Rather, merchants are encouraged to use various couriers listed on a data and logistics site managed by Cainiao. Alibaba has vigorously denied controlling the company, saying it only owns the 47 percent stake and less than half the board seats.

SEC Wants To Determine If Alibaba Controls Logistics Affiliate

However, it isn’t lost to analysts that Cainiao’s CEO Judy Tong is part of Alibaba’s partnership committee. The powerful committee nominates most of the people who sit on the ecommerce company’s board. If the SEC concludes that Alibaba has control, it will force it to consolidate the unit. This will reduce the parent company’s profit margins and make it look more of a capital intensive company like its major rival JD.com.

While it is possible that the SEC could take no action, investors are hoping such a thing won’t happen. This would ruin the company’s reputation and potentially wipe out a huge portion of its market value. With the Chinese economy slowing down, such a scenario is unwanted. Alibaba spent more than $8 billion in the year ending March to buy shares in Cainiao and other companies dealing in matters such as virtual reality and food delivery.

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