Shares of e-commerce platform Etsy (NASDAQ:ETSY) closed lower by 8.4% following the release of an expose from Citron Research. Citron has accused Etsy’s management of “knowingly or, at the very least, negligently,” allowing the sale of counterfeit items on the platform. The short seller also believes Etsy has encouraged this behavior by providing product placement and status for counterfeit goods.
Citron first backs up its claim by noting Etsy’s terms of service forbids the sale of “Unauthorized replicas or copies of items, and patterns or designs enabling their creation.” However, a search for the keyword “Disney” yields over one million results.
Citron points out seven of the top eight results are obviously counterfeited goods. In addition, the top four results are advertisements from sellers who have paid Etsy to rank higher in search results. One of these sellers who allegedly sells counterfeit goods has made more than 34,000 sales and is labeled as a “Star Seller.”
ETSY Stock Falls on Counterfeit Goods Accusations
Next, Citron shows a search for the keyword “Nike,” which spits out close to 200,000 stores selling Nike (NYSE:NKE) products. Citron mentions the top six out of eight search results were paid advertisements and “clear counterfeits.” It isn’t just counterfeit clothing, however. The short seller provides examples of fake Rolex watches, jewelry and designer handbags.
Citron has noted it will not release a complete short report on Etsy, adding, “However, it is fair and reasonable to assume that the company has known about this problem and either turns a blind eye to it, or worse, knowingly, sells advertising and credibility to the violators.”
The short seller states it expects Etsy to respond to the expose by pointing out how many vendors they have banned for policy violations. Citron characterizes this anticipated response as “obviously bullshit.”
Citron also anticipates Etsy will post a statement saying it supports small merchants and that other e-commerce websites, such as eBay (NASDAQ:EBAY), sell counterfeit items as well. Through Citron’s research, it has not found nearly as many counterfeit items on eBay compared to Etsy. Citron concludes these items have been a lingering problem for Etsy for the past seven years while management has failed to solve the problem.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.