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Alibaba Is Facing a Revived Lawsuit Over Not Doing Enough to Stop Counterfeit Goods

December 5, 2017, 4:06 PM UTC

A U.S. appeals court on Tuesday revived a lawsuit accusing Alibaba Group of defrauding shareholders by concealing a regulatory warning about counterfeiters that the Chinese online retailer had received shortly before going public.

The 2nd U.S. Circuit Court of Appeals in Manhattan ruled 3-0 that a lower court judge erred in dismissing claims by holders of Alibaba’s American Depositary Shares and ADS call options against Alibaba, Executive Chairman Jack Ma and others.

Alibaba (BABA) had no immediate comment. The company has long faced accusations that its websites are a haven for counterfeiters, including of luxury goods.

Shareholders accused Alibaba of concealing a meeting on July 16, 2014, two months before its $25 billion initial public offering, in which China’s powerful State Administration for Industry and Commerce threatened huge fines if Alibaba failed to suppress counterfeiting.

The price of Alibaba’s ADS fell 12.8% on Jan. 28 and 29, 2015 after the SAIC revealed its concerns about products that were banned, fake or substandard, or infringed trademarks.

In June 2016, Chief Judge Colleen McMahon of the U.S. District Court in Manhattan dismissed the nationwide lawsuit, saying Alibaba had flagged the regulatory risks in its IPO materials.

But in Tuesday’s decision, which did not rule on the merits, the appeals court said the plaintiffs adequately alleged that Alibaba intended to defraud them.

It called the SAIC threat “highly material” to investors because it “required Alibaba to choose between giving up an important source of its revenue or risking enormous fines,” either of which could hurt results or the IPO’s success.

“Given the eventual market reaction to revelation of the information that was concealed at the time of the IPO, its revelation would likely have had a multi-billion dollar negative effect,” the appeals court said.

The lawsuit was returned to McMahon for further proceedings.

Robert Kry, a partner at MoloLamken representing the plaintiffs, said: “We’re pleased with the decision, and look forward to proving our claims.”

Alibaba shares were up $2.08 at $171.66 in morning trading in New York.