After more than a year, it looks like the heads have finally stopped rolling in the aftermath of a 2011 online fraud scandal that cost former Alibaba.com CEO David Wei his job. A Chinese court recently found 13 people who set up phony storefronts on the B2B website guilty of fraud and sentenced them to serve prison sentences ranging from 1 year to 44 months.
According to a statement released by the Binjiang District Court in Hangzhou, China, the defendants bought several Alibaba.com "Gold Supplier" accounts in September 2010 and began marketing merchandise via the website to overseas buyers using various front companies with names such as Shanghai Zhonglu Refrigeration Engineering, Hangzhou Micron Computer Technical Services, and Cao Country Yuquan Wood Industry. Over several months, nearly 100 overseas buyers paid the defendants more than RMB 500,000 ($79,000) but never received their orders or received shoddy goods, the court said. Authorities filed six separate cases against the 13, accusing them of deliberately swindling buyers.
The convictions are part of ongoing fallout from a 2011 internal investigation by Alibaba.com into an increase in fraud being committed through the platform. That investigation revealed that some 100 Alibaba.com employees helped scammers circumvent the website's screening process. Ultimately the probe resulted in the resignations of Wei, the CEO, and COO Elvis Lee in February 2011 for failing to act swiftly and decisively to curb the fraud outbreak. The total number of suppliers who were committing fraud remains unclear, but the 13 who were convicted were among them, the court said.
Following the scandal, Alibaba.com, which is listed on the Hong Kong stock exchange, overhauled its management structure and pay incentives, and shifted its business strategy to improve the quality of members using the website. The impact of these changes has been profound. On May 25, Alibaba.com shareholders will vote on a plan to take the company private, a move that is being made in part because the new strategy is slowing revenue growth and management expects the price of Alibaba.com stock will be negatively impacted for the foreseeable future.