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Alibaba Group Holding Ltd Slumps After Revealing SEC Probe

Alibaba disclosed today that its accounting practices are being probed by the U.S. Securities and Exchange Commission. The Chinese online retailer said investigators are trying to determine whether the practices violate federal law and that it is cooperating with the investigation. The news comes the same month short-seller Jim Chanos claimed the company’s accounting looks shady, even by Chinese standards.

Alibaba Group Holding Ltd Slumps After Revealing SEC Probe

Alibaba’s Singles’ Day festival in focus

Alibaba said the SEC requested some documents and information on Cainiao Network, a logistics company that has a close relationship with it. Regulators also asked for data pertaining to sales during the company’s massive Singles’ Day shopping festival, which is basically China’s Black Friday or Cyber Monday, explains CNN Money.

The media outlet adds that although it’s unclear exactly what regulators are focusing on, critics have previously complained about the gross merchandise volume numbers from Single’s Day. While this metric covers the amount of merchandise shoppers are buying during a certain timeframe, it doesn’t account for factors like returns or if a seller is unable to deliver a product because they ran out of stock.

In 2015, Alibaba reported $14.3 billion in gross merchandise volume just from Single’s Day alone. The shopping day is the world’s largest shopping festival and makes up more than the total sales on Black Friday and Cyber Monday in the U.S., according to Reuters.

Regulators look into Cainiao Network

The issue with Cainiao Network is the way Alibaba accounts for its financial performance, an issue flagged by short-sellers Jim Chanos and research firm Pacific Square Research. The logistics firm handles most of Alibaba’s deliveries, and the online retailer has a 47% stake in it. Recently Cainiao raised $1.5 billion from investors. Although the two companies operate independently, Cainiao President Judy Tong sits on Alibaba’s partnership committee, and Alibaba said in its annual report that the logistics company sustained net losses of $94 million on $472 million in revenue last year.

The SEC informed the online retailer that the investigation and request for documents do not necessarily indicate that it had violated federal laws. Alibaba said the investigation is ongoing and that it can’t predict when it will be finished.

Shares of Alibaba declined by as much as 3.91% to $77.95 during regular trading hours today. A spokesperson did not respond to a request for comment.

An earlier version of this article referred to Pacific Square Research as a short-seller, but the firm does not take any positions in the companies it writes on. This article has been corrected.