China's flag flies in front of the New York Stock Exchange before the initial public offering of Alibaba Group Holding Ltd, September 19, 2014.
In September, Alibaba Group launched the largest IPO in history, raising $25 billion from investors keen to own a slice of China’s most successful e-commerce company. For the moment, the potential for vast wealth overrode concerns about Alibaba’s unusual corporate structure and governance practices. Maybe it shouldn’t have. Alibaba uses what is called a variable interest entity (VIE) structure, which has its roots in the collapse of the energy giant Enron in 2001 and could likewise be the downfall of investors in Alibaba and other Chinese stocks.
ARTFUL DODGE
The VIE structure involves control of a company through contracts
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