Alibaba is SEC’s Latest Target

May 26, 2016

By Myn

The U.S. Securities and Exchange Commission (SEC) is investigating into Alibaba’s sales on November 11, 2015, or Singles Day in China, which generated more than $14 billion in revenue for Alibaba. The SEC is looking into the company’s consolidation practices, party transaction and reported data to identify whether Alibaba violates the federal laws.

The news fired up a discussion whether Alibaba falsified the data to increase sales volume so that it could mislead the investors about the speed of Alibaba’s growth. Jay Ritter, finance professor at University of Florida, suggests that Alibaba may record the cancelled orders in the following quarter to push up the sales figure at the time.

Alibaba’s shares stumbled 6.8% on Wednesday following the news. S&P Global Market Intelligence already downgraded its ratings on Alibaba’s stock to “Buy” from “Strong Buy.”

However, according to Morgan Stanley, the investigation in Alibaba can be a misunderstanding. SEC also requested information on the e-commerce goods delivery system Cainiao Network, which Alibaba owns 47%. With such stake in Cainiao, an equity method is applied to report Cainiao’s earnings instead of a consolidation method.

Robert Lin, analyst at Morgan Stanley, said that they don’t think Alibaba engaged in any wrongdoings given its increased transparency, disclosures on Cainiao and other related parties. Besides, Cainiao’s revenue accounts for about 3% of Alibaba’s revenue, which would not create much difference using the consolidation method.

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Alibaba announced that the SEC’s request is not an indication for the company’s violation and it could not predict when the matter would end. However, the company is cooperating with the SEC in the investigation. “Accounting issue” soon appears as a new event on Alibaba screen as the crowd discussed about the company’s accounting case.

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