Alibaba lashes out at China

The numbers were good, just not good enough for the analysts.

With markdowns as high as 9 percent, traders were frantically trying to let go of their shares in the Chinese Internet giant Alibaba in New York on Thursday while others scooped them up.

Revenues rose 40 percent in the fourth quarter of 2014 to $4.2 billion, but markets were expecting more. Moreover, net income fell unexpectedly by 28 percent to $957 million.

A day earlier, reports that Chinese state regulators were investigating Alibaba had depressed the retailer's share price. On Wednesday, the State Administration for Industry & Commerce in Beijing published a report online accusing Alibaba of having failed to block counterfeit products or "illegal deals" from finding their way into its marketplaces.

One such sales platform, Alibaba's Taobao, denied the allegations and countered with accusations of its own against the head of the SAIC's Internet monitoring, Liu Hongliang. It said Liu was guilty of "procedural misconduct" and called the reports' conclusions subjective and libelous.

It was uncharacteristic for a Chinese company to so vehemently defend itself against accusations by government overseers. Alibaba didn't even hesitate to publicly defy a state representative like Liu Hongliang.

Until now, large foreign car manufacturers such as Volkswagen subsidiary Audi, Mercedes-Benz, BMW and Japanese automotive suppliers have come to the attention of China's authorities. The case of Alibaba was the first time a Chinese flagship company was targeted.

Falling out of favor with Beijing?

Alibaba founder Jack Ma's rapid ascent from schoolteacher to heading the world's biggest online retailer has become somewhat of a truism in the Chinese media. The headlines surrounding Alibaba's IPO on Wall Street - the most successful public launch in history - were euphoric to say the least.

Alibaba could act as a litmus test of just how independent a company in China can be, Nicholas Howson, who has worked as a lawyer in China and now teaches law at the University of Michigan, said in an interview with the Associated Press.

"Maybe SAIC is making the point that it can go after domestic companies as well as foreign companies," Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, also told the Associated Press. "What could be better than criticizing someone at the top of the food chain?"

Market analysts are now wondering whether Jack Ma's days as a role model entrepreneur in favor with Beijing are over.

Trying to shake a sleazy image

Alibaba's number two man, Joe Tsai, maintained an air of diplomacy a day after the SAIC published its report.

"For us, there's nothing that is more important than the trust that consumers have in our platform," Tsai said in an interview with Bloomberg TV. "We take a very Draconian approach toward counterfeits."

As far as Alibaba's efforts to rid its website of counterfeit products go, Tsai said the company has worked with law enforcement officials to shut down factories and warehouses that produce counterfeit products.

But manufacturers of Western brands are still uneasy about the prevalence of fake goods in China.

The authorities apparently confronted Alibaba's managers in July 2014 with the information from their report. Yet nothing was mentioned in the prospectus the company released before its big IPO last year.

What the prospectus didn't say

If material information was not disclosed in the company's sales prospectus leading up to the IPO, it could spur legal action against Alibaba and the banks it consulted before its Wall Street debut, according to Reena Aggarwal, a finance professor at Georgetown University who spoke to the Associated Press.

If the SAIC's investigation had been disclosed in the sales prospectus, it would have been much harder for Alibaba to persuade international and US investors to buy its shares, according to Sam Hamadeh, a chief executive at an IPO research firm.

"There's no question the narrative would have started to change, there would have been questions at their road show," Hamadeh told the Associated Press.

The roadshow, however, only focused on Alibaba's successes. Potential major investors in the US were enticed with talk of huge market opportunities and the potential of Alibaba's shares.

Exactly how much Alibaba executives knew about the authorities' investigations in the run-up to the company's IPO remains unclear.

Tsai denies any speculation of wrongdoing out of hand. In a conference call with investors published on the website of the Hong Kong broadcaster Phoenix TV, Tsai seemed surprised.

"The first time we took note of the report was yesterday when the SAIC published it online," he said.

When asked why the public wasn't made aware of the SAIC's accusations before Alibaba's IPO, Tsai was unambiguous: "I want to make very clear that Alibaba never persuaded or requested the SAIC to postpone publication of any report," he said.

The SAIC's report has meanwhile been removed from the regulator's website.