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U.S. SEC probes Alibaba accounting methods, shares dive

Chairman and chief executive of Alibaba Group Jack Ma reacts during a session of "Future-Proofing the Internet Economy" at the World Economic Forum (WEF) in China's port city Dalian, September 9, 2015. REUTERS/Jason Lee

(Reuters) - U.S. regulators are investigating Alibaba Group Holding Ltd's (NYSE:BABA - News) accounting practices to determine whether they violated federal laws, the Chinese e-commerce company said, news that sent its shares down nearly 7 percent on Wednesday.

Alibaba, a massive business selling to a growing middle class in the world's most populous country, said it was being investigated by the Securities and Exchange Commission. Questions about its growth rate and its relations with affiliated companies have dogged it for years.

The SEC focused on the accounting for logistics firm Cainiao Network, which Alibaba owns with several courier companies in China, as well as operating data from its Singles' Day, an annual sale that accounts for more than the combined sales of the Black Friday and Cyber Monday shopping events in the United States, according to Alibaba's annual report filed on Tuesday. (http://bit.ly/1XwuQ1o)

Some merchants in China have questioned whether Singles' Day sales are as high as reported by Alibaba.

The annual report included Cainiao profit, revenue and balance sheet data, and Alibaba spokesman Robert Christie said those figures are "exactly the kind of robust and transparent information that will address the underlying issues in SEC’s inquiry."

There are no other undisclosed U.S. SEC inquiries, Christie added.

Noted short-seller Jim Chanos of Kynikos Associates, who has been betting on a huge decline in Alibaba shares, last year called Alibaba’s delivery and warehousing infrastructure “a risk,” according to a report he sent out at a conference last November which was seen by Reuters.

Alibaba “appears to control Cainiao via 48 percent stake and consolidates the results via equity method,” Kynikos said. “Cainiao’s business is capitally intensive. It is unclear how much of this capital will be spent by Alibaba versus the delivery partners.”

Hedge-fund manager John Hempton of Bronte Capital, who has been shorting shares of Alibaba, said the company's accounting for acquisitions was "The next shoe to drop".

The SEC advised the company that the investigation should not be seen as an indication that Alibaba had violated federal securities laws, Alibaba said. It added that it was cooperating with authorities.

Up to Tuesday's close, Alibaba's stock had fallen 12.3 pct in the last 12 months. On Wednesday it fell 6.8 percent to $75.59.

(Additional reporting by Jane Lanhee Lee and Peter Henderson in San Francisco, Jennifer Ablan in New York and Narottam Medhora in Bengaluru; Editing by Anil D'Silva and David Gregorio)