E-COMMERCE: JD Dodges a Bullet, Gets Support from E-Commerce Has-Been

Bottom line: A US prosecutor’s decision not to file rape charges against JD.com’s founder may bring short-term relief to the stock, but the case still shows the importance of understanding the unusual role Chinese founders play at their companies.

Scales of justice tip in JD.com’s favor

On this day after Christmas I thought I’d play a little catch-up by weighing in on the controversial decision that saw a Minnesota prosecutor decline to press rape charges against JD.com’s (Nasdaq: JD) founder and CEO Richard Liu. Following the big announcement at the end of last week, there’s been a minor follow-up as another former China e-commerce executive came to Liu’s defense, only to get blasted himself and end up issuing an apology.

There are several big lessons in this tale, led by the fact that Chinese standards for what constitutes acceptable behavior are not always in sync with those in the West. That’s an important lesson for Western investors who may buy into these companies thinking that, for example, a JD.com is the same thing as Amazon.com (Nasdaq: AMZN). The JD case shows that clearly there are major differences in terms of behavior by both the companies and their founders.

A second lesson is that this case shows just how reliant companies like JD are on their founders, who are often larger-than-life figures whose own fortunes are inextricably tied to their companies. That’s not to say similar things don’t happen in the West. Mark Zuckerberg and Jeff Bezos are synonymous with Facebook (Nasdaq: FB) and Amazon, respectively. But in most cases many would argue their companies would be able to survive without their founders at the helm, which is something we’ve seen at Apple (Nasdaq: AAPL) following the death of Steve Jobs.

All that said, let’s turn our attention to JD with a quick recap of the story. The affable though somewhat country bumpkin-ish Richard Liu splashed into the headlines in late summer when a student accused him of rape while he was on a short-term study program at the University of Minnesota. Police conducted an investigation and handed over the case to the local prosecutor’s office a short time later to decide whether to press charges.

The prosecutor ended up taking its time to make a decision, and finally announced no charges would be filed at the end of last week, conveniently when less people were looking just before the holidays. (English article) The office cited “profound evidentiary problems” behind its decision, saying it was unlikely that any criminal charge could be proven beyond a reasonable doubt.

In all fairness, it does seem like these kinds of cases may be hard to prove. On the one hand it’s relatively straightforward to prove that a sexual act occurred, but quite another to show there was lack of consent. We did receive some salacious details that were leaked to the media along the way, including some text messages sent by the victim that did appear to show she was being taken advantage of. But Liu himself is quite a wealthy and influential man, and I suspect his expensive lawyers could have found ways to easily shoot down any arguments made by the alleged victim.

Bigger Issues

The case had weighed heavily on JD’s stock, which lost around 40 percent of its value in the months after the news broke. The shares jumped after the decision was announced, but quickly gave back most of the gains and are now down by more than half from a peak in early June. Some talk has been going around that a movement may be afoot to replace Liu, who holds an overwhelming portion of the company’s voting shares, or at least play down his role at the company.

Another interesting aside came earlier this week when Liu got some words of support from a man named Li Guoqing, the founder and former CEO of Dangdang, which was once billed as China’s Amazon. Li had called the incident merely an “affair” and even offered some tips on how to court a woman more properly. (English article) He issued an apology not long afterwards following an uproar over his remarks, though the apology seemed a bit muddled in my view.

The bottom line does appear to be that Chinese standards are a bit lagging behind the West in some instances, though clearly this case does seem to show the gap is closing. The fact that JD’s stock continued its slump even after Liu was cleared also seems to point to Western investors’ realization that JD’s fate is not so strongly tied to Liu as it is to the broader Chinese economy, which is clearly hurting these days.

All that said, it’s still important for Western investors to realize that these US-listed Chinese companies really shouldn’t be compared to local peers in terms of company behavior and behavior of their top executives. Instead, any serious investor should do a little homework and try to understand where these companies and their founders might be vulnerable, both due to personal issues and also issues particular to the Chinese environment.

 

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