There is a brewing battle between Chinese e-commerce giant Alibaba and the national regulator, the State Administration of Industry and Commerce (SAIC), over counterfeit goods sold in the New York publicly listed company.

SAIC released on Wednesday a report, made in July but held for six months until after the record-breaking initial public offering (IPO) of Alibaba in September that raised $25 billion fresh capital, accusing the company of not pursuing enough action to prevent fake products sold on its website, reports U.S. News.

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When Alibaba issued its prospectus prior to the IPO, it cited counterfeit products as one of the risk factors but didn't disclose any investigation.

The SAIC report caused a dip in value of U.S. traded shares of Alibaba on Wednesday, cutting price by 4 percent to $98.45. In the process, Yahoo, which owns a 15 percent stake in the online trading company established by former teacher Jack Ma, shed $1 billion.

Although the counterfeit products sold at Alibaba.com and Taobao are documented and have been included in U.S. report of notorious markets annually from 2008 to 2011, the SAIC report was the first time that the criticism came from Beijing and not a foreign government.

The report chided Alibaba for permitting illegal advertising that mislead consumers on low prices, for allowing some Alibaba workers to accept bribes, and its failure to curb fraud.

"Alibaba faces not only the biggest credibility crisis since its founding, but also casts a negative influence for other e-commerce operators," the report said, quoted by USA Today.

Alibaba, in turn, accused SAIC of bias and hints of misconduct by a public Chinese official. It specifically named a Liu Hongliang of misconduct and threatened to file a formal complaint in court.

In response to the SAIC report, Ma said he will create a fake-fighting special operations battalion to be made up of 300 people who will be backed by thousands of Alibaba employees already battling fake products advertised at Taobao and Tmall.

The e-commerce giant's boldness in trading barbs with a government agency is a first.

A China expert, Nicholas Lardy from the Petersen Institute for International Economics, said it could be SAIC's way of telling the global business community that it doesn't just pursue anti-trust investigations against western giants such as Microsoft and Chrysler but could also run after domestic firms, even if it is the largest in China.

The SAIC report could expose Alibaba and its underwriters to lawsuits in the U.S. for failure to disclose material information in its IPO prospectus, hints Reena Aggarwal, finance professor at the McDonough School of Business at Georgetown University.

Tagscounterfeit goods, Jack Ma, Taobao