John P. Gavin, CFA, NACD.DC
May 26, 2016
John P. Gavin, CFA, NACD.DC @ Disclosure Insight, Inc.
Independent Research Focused on Public Company Interactions with the SEC.

Alibaba’s SEC Probe: What’s Missing From This Disclosure?

Alibaba Group Holding Ltd – $BABA  

We parse the language used in Alibaba's newly-disclosed SEC investigation

Analyst Summary :   On 24-May-2016, Alibaba Group disclosed what appears to be an informal SEC investigation. This is the first time this matter has been disclosed. Details are scant, leaving the investor unable to adequately assess the risk it poses. Using the template of who/what/where/when/why, we will examine what is missing. Our conclusion is you are left with a risk that management views as material but you cannot analyze. We generally recommend avoiding such scenarios.  


Disclosure Insight
®
Report
May
2
6
,
2016
Alibaba Group Holding Ltd
–
BABA
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SEC
Investigation
Disclosed
Alibaba’s SEC Probe: What’s Missing From This Disclosure?
If we alert you to existence of an undisclosed SEC probe, that means we filed a Freedom of Information Act (FOIA) request
with the SEC on the company in question
and have a response, in black
-
and
-
white, on government letterhead that supports
our statement.
Other interpretative guidance and disclosures appear below.
Analyst Summary
:
On 24
-
May
-
2016, Alibaba Group
disclosed what appea
rs to be an informal SEC
investigation.
This is the first time this matter has been
disclosed. Details are scant, leaving the investor unable
to adequately assess the risk
it
poses. Using the template
of who/what/where/when/why, we will examine what is
mi
ssing.
Our conclusion is you are left with a risk
that
management views as material
but
you cannot analyze.
We generally recommend avoiding such scenarios.
Facts of Interest or Concern
:
The following is
Alibaba
Group
’s
disclosure from the
20
-
K filed
24
-
May
-
2016
–
Earlier this year, the U.S. Securities and Exchange
Commission, or SEC, informed us that it was
initiating an investigation into whether there have
been any violations of the federal securities laws.
The SEC has requested that we voluntarily
provide it
with documents and information relating to,
among
other things
: our consolidation policies and practices
(including our accounting for Cainiao Network as an
equity method investee), our policies and practices
applicable to related party transac
tions in general,
and our reporting of operating data from Singles
Day. We are voluntarily disclosing this SEC request
for information and cooperating with the SEC and,
through our legal counsel, have been providing the
SEC with requested documents and inf
ormation. The
SEC advised us that the initiation of a request for
information should not be construed as an indication
by the SEC or its staff that any violation of the
federal securities laws has occurred. This matter is
ongoing, and, as with any regulato
ry proceeding, we
cannot predict when it will be concluded.
[emphasis
added]
We’ve not researched Alibaba
Group
in the past.
Therefore we have no history or documents in our
database on this company.
Analyst Observations
:
Using
our
template of
who/what
/where/when/why, we
now
examine what is
missing
from
the
Alibaba disclosure
.
Who is investigating?
So far it appears just the SEC
is investigating which make this a civil matter.
What are the issues?
We draw your attention to
those words, “
among othe
r things
” that appear in
the disclosure just before the company lists some of
the items under investigation.
Be careful
:
We’
ve
seen cases where
something similar to that
term of
art was actually cover for matters
left out of
a
disclosure
that would really
bother investors.
So while you are told the probe pertains to, “
among
other things
: our consolidation policies and practices
(including our accounting for Cainiao Network as an
equity method investee), our policies and practices
applicable to related p
arty transactions in general,
and our reporting of operating data from Singles
Day”, we recommend you
press the company to
simply tell you
what those “other things” are that
were left out of the disclosure.
The best question to ask: What are
all
the ma
tters
on which the company has been asked to produce
records, information, and/or testimony? The devil
could easily be in those details.
The company will
know the answer and there is
usually
no restriction
on them answering this question.
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Alibaba Group Holding Ltd
–
BABA
May
2
6
, 2
016
Where does it s
tand?
If the
company
is to be
believed
,
the probe started earlier this year
. That
puts us in
the early stages of what could
easily
become a multi
-
year investigation. Further, we also
note there is just enough ambiguity in the language
to have us wonderi
ng if this probe is now formal. It’s
certainly worth asking.
When did this begin?
This is one of the most
important
questions investors need answered
.
Knowing when it began gives investors a sense of
how long it has been going on. That alone is
pote
ntia
lly valuable information.
For example, if
there were negative research reports or news stories
circulating in the past, and you see the SEC started a
probe shortly thereafter, it’s a good bet some of the
items in those reports/stories either triggered the
SEC probe or are included as part of it.
Th
is
is the first time a disclosure relating to this
matter has been made by the company
.
In this case,
w
e are
a
bit troubled by the language sta
ti
ng
the
probe started “
Earlier this year
”.
How much earlier,
exa
ctly?
T
he first time
Alibaba
had contact with the
SEC’s Division of Enforcement on this matter
cannot
be discerned from the disclosure
.
You really want to
know this.
Why is the company disclosing this now?
Including
the 20
-
F filed
on 24
-
May,
Alibaba
made four other
official SEC filings this year (29
-
Jan, 12
-
Apr, 25
-
Apr,
and 05
-
May
-
2016
).
Two of them were earnings
announcements.
For an SEC probe that began,
“earlier this year”, it sure appears there was plenty
of opportunity to disclose this sooner. T
his instantly
begs the question of ‘what changed?’ That is, for all
this time the company did not judge this matter
sufficiently material to disclose. Something changed.
The materiality threshold, which is at the core of
how we view the world, says that
in general
companies are only required to disclose matters
deemed material and, often to the chagrin of
investors, manag
ement is the judge.
It’s safe to
assume that something about this matter
caused
Alibaba
executives to feel compelled to make
this dis
closure, scant as the details are.
Until now,
t
hey did not judge this posing a material risk to the
company
.
Now they do
, and there is not enough
here for you to analyze.
Finally, whenever we examine disclosures from a
company where we know there is more
information
available than the company is providing, it
l
eaves us
questioning the overall thoroughness of the company’s
remaining disclosures and information being provided to
investors.
-
-
They Know It. Now You Know It.
®
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Alibaba Group Holding Ltd
–
BABA
May
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, 2
016
Our
Disclosure Insight®
reports, like those coming from other financial news and data providers, provide the investing
public with commentary and analysis on public company interactions between investors and/or with the SEC and other
agencies. They
are journalistically based in large part on our expertise with federal filings using the Freedom of
Information Act.
“
Disclosure Games
®
”
is a trademarked term we use to highlight those public companies engaging in disclosure practices
that in our opinion
may be misleading, confusing, evasive, or otherwise lacking the transparency needed for investors to
make well
-
informed investment decisions regarding a potentially material exposure.
Notes
:
The SEC did not disclose the details on investigations referen
ced herein. All we know is that they somehow pertain
to the conduct, transactions, and/or disclosures of the companies referenced. The SEC reminds us that its assertion of the
law enforcement exemption should not be construed as an indication by the Commi
ssion or its staff that any violations of
law have occurred with respect to any person, entity, or security. New SEC investigative activity could theoretically begin
or end after the date covered by this latest information which would not be reflected her
e.
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, 2
016
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