When on April 12, Jumia listed 17.6 percent of its authorised shares on the New York Stock Exchange (NYSE), becoming the first African startup to register a presence on Wall Street, it was welcomed with excitement; others were expected to follow its lead. Jumia’s share price, initially offered at $14.50 rose more than 200 percent in the first three trading sessions, eventually peaking $49.77.
But four months down the road, the New York story of Africa’s largest e-commerce has changed dramatically. It is now struggling with internal fraud and legal threats, which have seen its IPO price plunge from peak $49.77 to below the initial price of $14.50 and analysts say its future is uncertain.
The initial red flag was raised weeks ago by Citron Research, authored by famous short seller, Andrew Left, which alleged that despite massive discrepancies between Jumia’s confidential investor presentation from October 2018, stating that 41% of orders were returned, not delivered, or out rightly cancelled and what the company reported to the America’s Securities Exchange Commission (SEC) while filing to be listed on the exchange, the company escaped America’s SEC scrutiny and failed to give investors indication of the scale of the problem.
U.S. securities laws enforced by the SEC require public companies to publicly disclose meaningful financial and other information to investors. This, Citron Research said Jumia failed to do and the SEC failed to detect before clearing it for listing.
“In 18 years of publishing, Citron has never seen such an obvious fraud as Jumia. As the media in the U.S. is naively anointing Jumia the ‘Amazon of Africa’, the media in its home country of Nigeria has a plethora of articles discussing the widespread fraud in this Nigerian company. Not even that elusive Nigerian prince can cover this one up,” Left had alleged.
“In order to raise more money from investors, Jumia inflated its active consumers and active merchants’ figures by 20-30% (Fraud). The most disturbing disclosure that Jumia removed from its F-1 filing was that 41% of orders were returned, not delivered, or cancelled. This was previously disclosed in the Company’s October 2018 confidential investor presentation.
“This number is so alarming that it screams fraudulent activities. Instead, Jumia disclosed that ‘orders accounting for 14.4% of our GMV were either failed deliveries or returned by our consumers’ in 2018. Assuming 41% of orders were returned, not delivered, or cancelled in 2018, this implies that almost 30% of orders were cancelled in 2018.
“Jumia pays commissions to a sales force of Nigerians that place orders for other people using their ID numbers, Jforce Consultants. Sales through Jforce Consultants account for 30-40% of net merchandise value for Jumia. Last month, Jumia amended its F-1 and added language that Jumia ‘recently received information alleging that some of our independent sales consultants, members of our JForce program in Nigeria, may have engaged in fraudulent activities.’ This language was missing from the original F-1 from just a month earlier.
“Since Jumia primarily sells consumer electronics, which should not have this high of a cancellation rate, it reeks of fraud.”
Left also alleged that Jumia Group is not a Nigerian company as it is led by French founders, incorporated in Germany and headquartered in Dubai. Other issues include cases of previous fraudulent activities that paint Jumia a fast-growing ecommerce site, yet it is struggling to survive.
Indeed, Jumia was founded in Lagos, Nigeria, in 2012 by two French entrepreneurs: Jeremy Hodara and Sacha Poignonnec, ex-Meckinsey consultants – alongside two African partners, Nigeria’s Tunde Kehinde and Ghana’s Kofi Afaedor, two of whom have been paid off.
Left’s allegation was followed by several law firms instituting class action lawsuits against it in U.S. courts. A law firm, Kaskela Law LLC, announced a class action lawsuit against it on the grounds of violation of laws governing securities exchange.
The law firm, based in Pennsylvania, said it sued Jumia Technologies in the interest of the investors who purchased the e-tailer’s American depositary shares between April 12 and May 9, 2019. Kaskela then asked stock traders who fall under this category and those with losses in excess of USD 100 K to join the case as lead plaintiffs.
Kaselka Law said that Jumia general presented false and misleading statements who investors who have now complained of losses on the exchange. Of the four accusations leveled against the company, the foremost is that it had materially overstated its active customers and active merchants.
According to the drawn lawsuit, Jumia’s representations of its orders, order cancellations, undelivered orders and returned items lacked an adequate factual basis, which implies that the company materially overstated its sales volume.
The law firm also claimed that the firm failed to sufficiently disclose related party transactions and presented its financial statements, thus breaching established and applicable accounting standards.
Also in a press release, a Los Angeles-based Schall Law Firm – a national shareholder rights litigation firm – announced that it was carrying out an investigation on behalf of Jumia investors for the violation of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated there-under by the United States Securities and Exchange Commission. While this class case is yet to be certified, it is also in response to the Citron research.
Still a New York-based Rosen Law Firm, a global investor-rights law firm, announced that it was investigating potential securities claims on behalf of shareholders of Jumia Technologies AG, which culminate from accusations that the company may have issued materially misleading investing information to the public. The law firm, like Kakela, has also encouraged investors would have lost more than USD 100, 000 to make contact as the examination is ongoing.
Scott+Scott Attorneys, another law firm has also begun its own investigation in NYSE against Jumia and the company’s officers and directors who are reported to have violated federal securities laws.
Jumia has admitted it recently uncovered cases of improper orders placed and subsequently cancelled on its marketplace platform wrongly inflating its order volume. The company said some of the improper sales practices were carried out by its own personnel in “Jumia Force,” its network of commissioned agents
The improper orders generated around $17.5 million in gross merchandise volume (GMV) value between the last quarter of 2018 and the first two quarters of 2019, according to the report. GMV is a metric used by e-commerce companies to highlight the total value of merchandise sold through the site.
The company however, argued that the improper orders had no effect on its financial statements, while at the same time, acknowledging that the reported GMV figure for Q2 2018 had been adjusted in light of the improper transactions.
Jumia also said that the employees involved have since been suspended pending a review. But analysts say, while nothing has been proven against it, the explanation is not tenable and will do little to improve the company’s image going forward.
“What they will be charged with is presentation of false information. That’s what it is. It is not just them, all the auditors, the accountants and even the directors of the company because the directors are the owners of the account and they have a responsibility to make sure that they do whatever is necessary to see that the results they are presenting to the public are true and fair,” noted Emeka Madubuike, analyst and former, President of Association of Stock broking Houses of Nigeria (ASHON)
“The fact that they are ‘contract’ staff doesn’t change anything because they are still responsible for the account. They ought to have put processes in place to ensure that whatever they get are accurate results.”
Madubuike however, noted that since the issues are still in the realm of allegation, “it is difficult for anybody to take a position. If we have a situation where an authority has indicted Jumia, then we can begin to talk about it.”
Since the fraud allegation broke, Jumia’s fortune has gone downhill, with the price of its stocks crashing and potential investors staying away.
Apart from experiencing heavy capital loses; the firm’s future is also in serious jeopardy as U.S. regulators have reportedly instituted investigations to verify the authenticity of the allegations, even as the affected investors have continued to argue that the company is vicariously liable to the actions of the “Jumia Force” staff.
The immediate aftermath of the scandal is that Jumia’s stock shed 50 percent, a trajectory that has continued. As a at 6pm Nigerian time on Friday, the stock traded at $12.16, a further slip from the day before.
Jumia remains unprofitable. While it’s Q2, 2019 top line grew to €39.2 million from €24.8 million a year ago, its net losses widened significantly to €67.8 million from losses of €42.3 million a year earlier.
The company reported 4.8 million active customers base, up 500,000 from the quarter of the year. Its gross merchandise volume (GMV) is also up by 69% year-on-year and “parallel” to GMV and customer base growth, the company also reports year-on-year increases in market place revenue (90%) and gross profit (94%), yet operating losses have widened year on year and quarter on quarter.
The company has accumulated an excess of over $1 billion in losses since inception in 2012.
BusinessHallmark contacted Jumia’s Head of PR & Communication, Mr. Olukayode Kolawole on Friday, but he declined comment on the issues, offering instead to send a statement issued by the company, but hadn’t at the time of filing this report.
However, the company’s CEO Sacha Poignonnec told investors the company was still working on a target of breaking even “towards the end of 2022.”
Speaking with journalists on Thursday in Lagos, Juliet Anammah, Jumia Nigeria CEO said the company’s operating cost amounting to €66.7 million decreased as a percentage of GMV by 148 basis points and GMV increased in Q2 by 69 percent compared to the corresponding quarter of 2018 due to a number of factors, including consumer acquisition and re-engagement momentum.
“These increases are a result of our continued focus on selection, price and convenience, as we strive to be the preferred online shopping destination for consumers in Africa for all their daily needs,” she said.
Equally disturbing to them is the fact that the All Shares Index also slid consecutively over the previous three year end periods from 2014 to 2016. Given the noted penchant of economic currents to flow in intermittent cyclical phases, does this say something about how long this present ‘wilderness experience’ could last? As we say in these parts; ‘may God forbid a bad thing!’