Fraud Scandal Hits China's Online Giant Alibaba

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Qilai Shen / Bloomberg / Getty Images

An Alibaba Group Holding Ltd. employee walks in front of the company's operations center in Hangzhou, China, on Jan. 27, 2010

A fraud scandal at Chinese e-commerce giant is delivering a sharp blow to a business built on faith in online transactions. On Monday, Feb. 21, the business-to-business site's CEO, David Wei, and COO, Elvis Lee, resigned, according to a statement filed with the Hong Kong Stock Exchange. While the two executives were not linked to the fraud allegations, they stepped down to "take responsibility for the systemic breakdown in our company's culture of integrity," read the statement. The next day, the company's shares dropped 8.6% in Hong Kong.

An internal investigation by independent board member Savio Kwan revealed that beginning in late 2009, Alibaba had noticed an increase in fraud claims against sellers designated as "gold suppliers," which means they had been vetted by an independent party as legitimate merchants. The investigation revealed that about 100 Alibaba sales people, out of a staff of 5,000, were responsible for letting fraudulent entities evade regular verification measures and establish online storefronts.

The company said it uncovered fraudulent transactions by 1,219 of the "gold suppliers" registered in 2009 and 1,107 of those in 2010, accounting for about 1% of the total number of gold suppliers during those years. It further said that "the vast majority of these storefronts were set up to intentionally defraud global buyers" by advertising consumer electronics at cheap prices with low minimum-order requirements. The average claim against fraudulent suppliers was less than $1,200.

On Monday, Alibaba founder Jack Ma emphasized the importance of integrity on the parts of both the company's staff and its online marketplaces. "We must send a strong message that it is unacceptable to compromise our culture and values," he said, according to the company statement. A former English teacher, Ma expanded Alibaba into a global leader in online commerce. He is one of China's most admired technology entrepreneurs, and in 2009 he was named to the TIME 100. He now heads Alibaba Group, which includes, consumer retail site and Alipay, a Chinese online payment system like PayPal. is partly owned by Yahoo!, though Ma has tried unsuccessfully to buy out that stake. Jonathan Lu, the CEO of Taobao, was named the new head of, a job he will hold concurrently with his position at Taobao.

In November 2010, Alibaba reported that it had more than 56 million members and had earned more than $570 million over the first three quarters of the year — a 30% increase over 2009. Alibaba said the fraud instances had "not had a material financial impact" on the company. But the damage to the company's reputation may have a more lasting significance.