Source : SCMP
Toh Han Shih Feb 22, 2011
Two top officers at mainland internet giant Alibaba.com (SEHK: 1688) resigned yesterday to take responsibility for a massive sales fraud conducted through the firm's e-commerce websites.
Analysts fear the scandal may be wider than what the Hong Kong-listed company has so far announced. Alibaba.com's share price fell 3.5 per cent to HK$16.68 yesterday.
Though not themselves involved in the fraud, David Wei Zhe resigned as chief executive officer and Elvis Lee Shi-huei as chief operating officer, the company announced on the Hong Kong Stock Exchange website yesterday afternoon. Jonathan Lu Zhaoxi, CEO of Alibaba's sister company, mainland internet shopping giant Taobao, stepped in as the new chief executive.
The resignations came after a presentation at a board meeting yesterday on the preliminary results of an internal investigation. It found that 1,219 mainland suppliers who signed up for Alibaba.com's "China Gold Supplier" programme in 2009 and 1,107 who signed up last year engaged in fraud against international buyers.
The fake suppliers would typically offer electronic consumer goods at low prices using dubious payment methods. Often the goods were never delivered, said John Spelich, vice-president of international corporate affairs at Alibaba Group, parent of the Hong Kong-listed firm.
"It was an organised group of people who attacked our platform and got a small percentage of our employees to help them," he said.
The company said it had shut down 2,326 "gold suppliers" who had been defrauding buyers, though they represented only 0.8 per cent of the suppliers using the site.
So far, the investigation found about 100 sales people out of its sales force of 5,000, plus some supervisors and sales managers, intentionally or negligently allowed the fraudsters to evade the company's security measures and systematically establish fraudulent electronic storefronts, said its announcement.
"One of our most important values is integrity. That means integrity of our employees and integrity of our online marketplaces as trusted and safe places for our customers," said Jack Ma Yun, the non-executive chairman who founded the company with 17 co-founders in 1999.
"We must send a strong message that it is unacceptable to compromise our values. David and Elvis are doing the honourable thing to accept full responsibility for this."
The investigation found there was a culture emphasising the pursuit of short-term financial gain that influenced the sales staff, said an internal Alibaba company blog. "Sales people were incentivised to bring in as many paid suppliers as possible without regard to quality. There was a breakdown in the company's internal check-and-balances."
Nomura analyst Jin Yoon said: "There seems to be a lot more to the story."
It is possible more people were implicated than the numbers announced, he said, adding it did not make sense for the CEO to resign over fraud committed by a small percentage of its employees and suppliers.
Spelich declined to comment as the investigation was ongoing.
The temptation for employees to earn more than their salaries also suggests the fraud could be larger, said a Singapore venture capitalist.
"It seems much bigger than the numbers announced," he said. "It sounds like a massive fraud. Alibaba's whole business model is in question if it cannot resolve this issue. People will be too frightened to do business through Alibaba's online platform. I think it's unavoidable. It's China. It's the Wild West."
A JP Morgan report was more circumspect: "We view Alibaba as a young internet company that might lack proper internal control in some areas. The company's actions demonstrate its adherence to high standards of integrity. The situation reminds us of [Chinese search engine] Baidu's lack of internal control over its sales force in 2008. Baidu eventually put proper checks and balances in place, and continues to enjoy solid growth."
Founded in 1999, Alibaba Group was one of a minority of dotcoms that survived the collapse of the internet bubble in 2000. In 2005 it formed a strategic partnership with Yahoo and took over Yahoo's China business.
Alibaba Group listed Alibaba.com in Hong Kong in 2007, then the biggest internet IPO since Google's Nasdaq listing in 2004.
Alibaba Group has attracted investments by venture capital firms like Granite Global Ventures and KPCB China, the China joint venture of Kleiner Perkins Caufield & Byers, a prestigious Silicon Valley venture capital firm.
