By AYOOLA OLAOLUWA
An alleged accounting fraud at Jumia has put the New York Stock Exchange (NYSE) disclosure policies under a harsh spotlight, Business Hallmark can report. The company had listed on the New York Stock Exchange on April 12, 2018, with its Initial Public Offer (IPO) debuting at $14.50 per share.
The firm’s stock initially soared, peaking at a closing price of $46.99 the following week. The impressive run continued till the end of April, making the firm one of the 10 best performing IPO stocks on the NYSE in 2019.
However, the company’s impressive run on the NYSE has been considerably impeded by the exposure of an alleged book cooking by the management of the largest e-commerce operator in Africa.
Citron Research, authored by a famous short seller, Andrew Left, had 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 e-tailer escaped America’s SEC scrutiny and failed to give investors indication of the scale of the problem.
According to checks by BH on U.S SEC website, U.S. securities laws enforced by the SEC require public companies to publicly disclose meaningful financial and other information to investors. But Citron Research alleged that the SEC failed to detect the massive fraud perpetrated by Jumia before it was cleared 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.
“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 had written in the report.
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.
To compound Jumia’s troubles, several law firms have instituted 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 Pennsylvania-based law firm 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.
In line with the complaint released, Jumia is facing no less than five accusations. Kaskela Law said that Jumia generally presented false and misleading statements to 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.
In a press release, a Los Angeles-based Schall Law Firm – a national shareholder rights litigation firm – announced that it is carrying out an investigation on behalf of Jumia investors for the violation of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder 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.
Also, New York-based Rosen Law Firm, a global investor-rights law firm, announced that it is 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 K to make contact as the examination is ongoing.
Still on the Citron report, Scott+Scott Attorneys, has begun its own investigation in NYSE against JUMIA and the company’s officers and directors who are reported to have violated federal securities laws.
Since the fraud allegation broke, Jumia’s good fortune has gone downhill, with the price of its stocks crashing. Also, the unexpected revelation also spooked would-be investors who distanced themselves from the firm’s hitherto sought after shares.
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.
BH checks revealed that the immediate aftermath of the scandal caused a 50 percent drop in Jumia’s stock. The stock price which reached its highest price of ($46.99) on May 1st, 2019, closed at $23.40 at the close of trading on Friday, May 24, 2018.
Meanwhile, the management of Jumia Technologies AG has denied any wrongdoing, insisting that it stands with its prospectus. The Co-CEO of the company, Sacha Poignonnec, said in a terse statement obtained by BH that the information contained in its prospectus to investors are accurate, saying the report is “a collection of very selective and biased facts” designed to damage the company.
“Some recent allegations were made about Jumia on the basis of selected, biased or unverified facts with what appears to be a clear objective of damaging Jumia.
“We held our earnings call on Monday May 13th and we published our first quarter results, which we are very pleased with, and provided information to demonstrate those recent allegations are wrong. We encourage you to download our results and access the transcript of the call, both of which are publicly available.
“We stand by the disclosures we made in our prospectus, which accurately describe our business and the related risks in all material respects. We are very excited about the future and our prospects. We will not be distracted from executing on our strategy and carrying out our mission by people who seek to create doubt to profit at our company’s expense.
“In March, BCG published a report explaining that online marketplaces had the potential to create 3 million new jobs across the African continent by 2025. We very much believe in the positive impact of technology, and of Jumia, for the continent, and we look forward to continuing to create positive impact in the future,” Poignonnec said.
Investors, analysts and legal experts who spoke to BH said Jumia’s initial silence did not mean it had broken the law. But there is broad agreement that it made matters worse by not being more forthcoming with Co-Chief Executive Sacha Poignonnec, coming out to reaffirm the information the company’s prospectus four days after Citron Research’s allegation.
However, Citi Research, a Citibank subsidiary, debunked the Citron report authored by Andrew Left, saying it did not provide enough evidence to show that Jumia stock was a fraud aimed at duping investors.
Citi Research reaffirms confidence in the ecommerce giant as long as key markets such as Nigeria continue to grow at rates that sustain disposable incomes that can translate into active digital online purchases.
Efforts to get the reaction of the U.S. SEC as the regulatory body failed to react to an email sent to it by our correspondent. However, a stock expert who spoke on the condition of anonymity defended the U.S. SEC for its refusal to made public pronouncements on the allegations.
“SEC rules prioritize the accuracy of information over the speed of disclosure. If the regulator is unsure of the scale of a problem, it might delay releasing information in the interest of getting it right”, he said.
Meanwhile, the fortune of the firm has continued to improve. While its shares has gained on the NYSE, albeit marginally, in recent weeks, its financial report for the first quarter of 2019 showed it to be in good standing..
The report covers the company’s operations in various sectors conducted primarily online across 14 African countries. The report shows Jumia’s Gross Merchandise Volume (“GMV”) grew by 58 percent to €240 million in Q1 of 2019 on a yearly basis, on the back of strong marketplace growth, leading to a 102% increase this quarter in Marketplace revenue on a yearly basis.
The gross profit margin as a percentage of GMV increased from 5.6 percent in the first quarter of 2018 to 6.5 percent this quarter, as a result of the increased GMV monetization rate. Marketing and advertising cost has paled from 7.2% of GMV in the first quarter of 2018 to 5.1% in the first quarter of 2019.