The Chinese Internet giant seeking a U.S. initial stock offering as early as next month has troubling links to investors affiliated with the Chinese and Russian governments, according to reports.
Alibaba Group Holding Ltd. will likely receive approval from the Securities and Exchange Commission (SEC) for the stock sale that could raise as much as $20 billion, which would make it the largest U.S. IPO ever. Experts have raised concerns about investment and security risks posed by the offering, including Alibaba’s opaque corporate structure, the listing of counterfeit goods on its retail sites, and its alleged links to Chinese theft of U.S. corporate secrets.
Details about Alibaba’s ownership remain "murky," said Kevin Freeman, a chartered financial analyst and founder of the National Security Investment Counselor Institute, at a Center for Security Policy event about the IPO on Tuesday.
Investors led by the China Investment Corporation, a state-owned investment fund, paid $2 billion to acquire a 5.6 percent stake in Alibaba in 2012. The state-owned China Development Bank also provided a $1 billion loan to the company.
Jack Ma, Alibaba’s founder and largest shareholder, is a controversial figure. Critics say Ma directs Alibaba to invest in projects he personally supports, leaving minority shareholders in the dark.
Hong Kong last year rejected Alibaba’s plans to hold its IPO in the city over concerns about conflicts of interest and the company’s corporate structure, which grants a 27-member group of insiders the sole power to nominate a majority of its nine directors.
"We have to recognize—China is much more the rule of man than the rule of law," said Roger Entner, founder of Recon Analytics, in a recent interview with the International Business Times. "There are ways of—the laws don’t apply—the laws do not apply equally all the time. So, I think there are a lot of work-arounds and special deals and things like that. It’s part of the charm of investing in China and investing in Chinese companies."
Alibaba has not commented publicly on the stock sale during its pre-IPO quiet period, but the company does note in its SEC filing that its "contractual arrangements may not be as effective in providing operational control as direct ownership." The company also says its "governance structure and contractual arrangement will limit [shareholders’] ability to influence corporate matters, including any matters determined at the board level."
Another one of Alibaba’s major investors is billionaire Alisher Usmanov, reportedly Russia’s richest man and a member of Russian President Vladimir Putin’s inner circle. Usmanov’s asset-management company now holds a majority of its foreign Internet investments in Chinese companies after selling his stakes in Apple and Facebook.
Usmanov has been accused of buying out Russia’s leading social media network, VKontakte, in an effort to censor Russian opposition and pro-Ukraine bloggers. Prominent Russian dissident Alexey Navalny called on the United States to sanction Usmanov as one of Putin’s cronies in a March op-ed in the New York Times.
Additionally, a Florida-based biofuel company has accused the Chinese military and Aliyun Computing—the cloud computing subsidiary of Alibaba—of hacking its computers for trade secrets, according to a recent Washington Post report. Alibaba denied that it was involved in the attacks and said it responded by shutting down traffic from one of its servers that had been hijacked by unknown users.
The U.S. company’s accusations come amid mounting concerns about the Chinese government’s aggressive cyber espionage activities.
Congress and the Obama administration have raised few objections to the potential Alibaba IPO in New York. The company has enlisted high-profile lobbying firms to bolster its image in the United States, according to the Center for Responsive Politics.
The Alibaba Group has paid the Duberstein Group $100,000 this year for lobbying, a firm that also represents major U.S. corporate clients such as Comcast. Another lobbyist for Alibaba, Sidley Austin LLP’s James Mendenhall, is former general counsel for the U.S. trade representative and member of the committee that scrutinizes the takeovers of U.S. businesses by foreign investors.
Neither the Duberstein Group nor Mendenhall responded to requests for comment.
Sen. Bob Casey (D., Pa.), a member of the Senate Finance Committee, is one of the few lawmakers to raise concerns about Alibaba. He noted in a letter to the SEC last week that "in the past three years alone, the SEC has charged a number of China-based companies with fraud."
"The shell-company structure underlying these IPOs raises serious questions about the risks to investors in these Chinese firms," he said. "The SEC must take aggressive action to protect U.S. investors, assess the potential risks and protect the integrity of our markets."