February 21, 2011 1:36 pm

Alibaba chiefs go in wake of online frauds

Alibaba.com, the world’s largest online marketplace for trade between businesses, has replaced its chief executive after sales staff were found to have helped set up fraudulent online shopfronts.

David Wei, chief executive, and Elvis Lee, chief operating officer, both resigned on Monday to take responsibility for the “systemic breakdown in our company’s culture of integrity”, Alibaba said.

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The company said an internal investigation found that more than 2,000 of its “China Gold Suppliers” – companies certified by Alibaba as legitimate, credible businesses – had engaged in fraud against buyers, and that about 100 field sales people had allowed the fraudsters to evade its verification measures.

The allegedly fraudulent online shops, set up in 2009 and 2010, account for less than 1.1 per cent and 0.8 per cent of Alibaba’s total Gold Suppliers signed up during those two years respectively.

The drastic response of changing top management highlights how vulnerable e-commerce companies are to doubts that they can be relied on to secure supplier quality and honesty.

John Spelich, Alibaba spokesman, said: “This is very painful for us. The founders are very upset”.

Jonathan Lu, chief executive of Taobao, Alibaba Group’s unlisted consumer e-commerce affiliate, has replaced Mr Wei. Mr Lu will retain his position at Taobao.

Analysts said Mr Lu could use his experience in fighting fraud on Taobao at Alibaba.

Chen Shousong, an e-commerce expert at Analysys, the internet research group in Beijing said: “At Taobao, Mr Lu has broadened the benchmarks by which sellers are judged to include user experience. That can also be used for Alibaba.com”.

Alibaba had made public last year that fraud had been discovered on the site, but it had not said before that staff were involved. The problems come as the company is on an aggressive expansion path. Its headcount increased by almost one-third over the past year from 11,700 to close to 14,000.

In the third quarter of 2010, revenues grew 40 per cent over the same period in 2009 to Rmb1.4bn ($213m). As of September 30, it had more than 56m registered users and 750,000 paying members.

Alibaba.com said it had started to fight fraud as soon as it discovered the problem last year, and the number of fraudulent supplier accounts had started going down.

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