NEW YORK (Reuters) - A U.S. appeals court on Tuesday revived a lawsuit accusing Alibaba Group Holding Ltd BABA.N 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 said it was disappointed by the decision but that the ruling did not determine that Alibaba had violated U.S. securities law.
“We believe our behavior was entirely appropriate, and we intend to defend ourselves vigorously as this litigation progresses,” it said in a statement.
The appeals court in the Tuesday opinion said the plaintiffs adequately alleged that Alibaba intended to defraud them but did not rule on the merits of the case.
Alibaba 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 percent 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.
The appeals court 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.”
The case is Christine Asia Co et al v Ma et al, 2nd U.S. Circuit Court of Appeals, No. 16-2519.
Reporting by Jonathan Stempel in New York. Additional reporting by Peter Henderson in San Francisco.; Editing by Chizu Nomiyama and David Gregorio
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