Alibaba, Execs See Revived Stock Fraud Suit Over IPO Disclosures

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By Phyllis Diamond

Alibaba Group Holdings Ltd. and four of its top executives are back on the hook in an investor suit claiming they made material misrepresentations in connection with Chinese e-commerce giant’s record $25 billion initial public offering in September 2014.

The district court dismissed the would-be class securities fraud suit for various pleading deficiencies, but the U.S. Court of Appeals for the Second Circuit reversed. In a Dec. 5 summary order, it said the defendants’ failure to disclose a meeting with Chinese regulators shortly before the IPO “concealed the true facts” about a significant threat to the company—an omission that rises to at least a reckless disregard of an obvious disclosure obligation.

According to the complaint, two months prior to the IPO, high-level China regulators summoned Alibaba to a meeting in which they warned that unless Alibaba stopped hosting a marketplace for counterfeit goods, it would be subjected to hefty fines based on the daily gross value of merchandise sold on the concern’s e-commerce platforms.

Allegedly, this information was highly material to investors because it required Alibaba to choose between giving up an important source of revenue or risking significant fines, either of which would have a negative impact on the company’s finances and the success of the IPO. When the information was released four months after the IPO, Alibaba’s stock dropped 13 percent in two days, erasing $33 billion in market capitalization, the appeals court said.

The alleged failure to disclose the meeting in a way “that accurately conveyed the seriousness of the problems Alibaba faced” was a material omission that strongly supports an inference that Alibaba and its executives acted with scienter—culpable intent—the Second Circuit said in reviving the allegations.

The case is Christine Asia Co. Ltd. v. Ma , 2d Cir., 16-2519-cv, 12/5/17 .

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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