I am not sure how things play out in China when it comes to securities law. But in the United States, companies that seek to go public need to fully disclose to their would-be investors. Otherwise, the company can face a raft of lawsuits. The interesting thing is that a lot of these lawsuits are not put forth by the government. Instead, these are private lawsuits championed by private law firms.
U.S. securities law has many private lawsuit provisions. The reason for these provisions is that it enables the private sector to help the government police the overall health of the securities market. It seems like a lofty ideal, but in reality, it is exactly as it looks like: a mad dash for cash.
China-based global e-commerce powerhouse Alibaba Group (NYSE:BABA) found this out the hard way. It has been slapped recently with several lawsuits from private U.S. firms. These firms allege that the company knew there were risks but failed to disclose these risks. This is a serious wake-up call for Alibaba.
Looking at the particular trading platform that is the focus of such lawsuits, I can understand how Alibaba got into the mess it is in. Whenever you run a marketplace, you inevitably attract people who are looking to cut corners. How many dubious items are put up on eBay? How many scam products are put up on Craigslist?
To be fair to Alibaba, its Taobao marketplace is an open marketplace. Anybody can put up goods there to try to make money. What this all boils down to is whether or not Alibaba had legal notice that counterfeit goods were being sold on its platform. This should be the threshold. Unfortunately, Alibaba’s stock has taken a hit due to the negative publicity. This all, of course, stemmed from that inquiry by Chinese regulators regarding counterfeit sales.
I am sure this whole thing would blow over. Alibaba would probably settle those U.S. lawsuits. One thing is clear. It definitely had its baptism of fire as far as the U.S. legal system is concerned.