Alibaba Involved in Fraudulent Storefronts, CEO Wei Quits

by on February 22, 2011

The Chief Executive of Alibaba.com Ltd. is being prompted to quit, following an internal investigation which reported that as many as 2,300 vendors used its website to defraud global buyers. Ranging from organic fruits to personal computers, Alibaba is said to put forth a market place for customers to trade everything.

The Company’s shares are said to have fallen to a great extent in more than a year. China’s biggest electronic- commerce Company said that some of the employees of Alibaba had allowed the sellers to create bogus storefronts.

A statement as released by the Company which suggests the involvement of 1,219 of its ‘gold’, suppliers in 2009 and 1,107 in 2010 in the fraud. These frauds however are not likely to have ‘material financial impact’.

Alibaba.com CEO Wei Quits

It was found that 100 of the company’s 5,000 salespeople were intentionally or unintentionally engaged in letting the vendors dodge the Company’s authentication and verification measures to form ‘fraudulent storefronts’, for international customers.

The Company is said to have reportedly created a fund to compensate buyers who were defrauded in the year 2009. These frauds, according to Alibaba spokesman John Spelich comprised of the vendors bidding small quantities of electronics at attractive prices, with payments which could also be settled using ‘less reliable’, methods.

CEO David Wei and Chief Operating Officer Elvis Lee who was not even accused of any sort of wrongdoing stepped down refusing to take the take responsibility for the ‘systemic breakdown’, of integrity.

Amidst fears that the fraud and management shakeup were likely to wear away customer confidence and sales Alibaba is said to have lost around $933 million in market value in Hong Kong trading.

The Company which is managed by billionaire Jack Ma has reportedly seen a cut in investment ratings as the Analysts at Morgan Stanley, Mizuho Financial Group Inc. and Mirae Asset Securities Co. are said to have withdrawn their investments on the Company.

Furthermore, Chinese suppliers with global companies such as Wal-Mart Stores Inc. and Procter & Gamble Co. too are said to have done the same.

Jake Li, who rates the stock “neutral” at Guotai Junan Securities in Shenzhen said “For Alibaba, the reputation of their website and service is all-important. The scale of the problem doesn’t seem to merit such a high-level reshuffle, but Alibaba is taking quite decisive action to shore up the confidence of its users”.

The flagship unit of Alibaba Group Holding Ltd., to which Yahoo! Inc. is the biggest shareholder is said to have fallen 8.6%, which is believed to be the maximum since Sept. 15, 2009, to HK$15.24.

While Executive changes at the company were likely to lessen the number of customer additions said Richard Ji, an analyst at Morgan Stanley.

Alipay, an online payment service was reportedly formed n the year 2004 after Lu, 41, joined Alibaba in 2000. Lu, holding a master’s degree in business administration from China Europe International Business School reportedly served as Alipay’s president before his shift to Taobao in the year 2008.

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