Alibaba.com CEO David Wei and COO Elvis Lee have resigned this morning after an internal probe found that more than 2000 sellers on the e-commerce site were committing fraud, in some cases to the knowledge of Alibaba staff. The Hanzhou, China-based Alibaba told the WSJ that more than 100 sales staff (out of 5,000) were allowing fraudulent suppliers to fake the business registration papers needed to set up shop on the site. In some cases buyers never received items already paid for.
To Alibaba's credit, it embarked upon the internal investigations in order to preserve customer trust after one of its employees tipped the board off on suspicious activity. The average value of the fraud claims was $1,200 and Alibaba says that buyers who experienced fraud might be eligible for a "good-faith" payment.
While Wei and Lee were not personally involved in the activities that led to buyer complaints, they left their posts in order to take responsibility for the "systematic breakdown" at the site. Jonathan Lu, who runs the Alibaba Group-owned partner site Taobao.com has been named as a replacement.
Yahoo owns about 40% of the Alibaba Group, which doesn't expect it's financial results to change because of the management issues. One of the most rapidly growing e-commerce sites in China, Alibaba.com's third quarter net profit rose 55% to $366.1 million yuan ($55.7 million) in 2010. Alibaba.com shares fell 3.5% today to $16.68 yaun ($2.54) a share before the announcement.