Jumia Technologies (JMIA) , one of the most celebrated IPOs of 2019, is one big swindle according to Citron Research executive editor Andrew Left.

“In 18 years of publishing, Citron has never seen such an obvious fraud as Jumia,” Left wrote in his scathing report. “Jumia is the worst abuse of the IPO system since the Chinese RTO fraud boom almost a decade ago.”

Shares of the company plummeted nearly 15% shortly after the report hit the presses, tempering a gangbusters gain after hitting markets.

Startling Start

To assess the company as it prepares its first earnings report in just one week in light of the development, its proper to contextualize just how hot the stock was and why many were so bullish initially.

Shares of the Lagos, Nigeria-based African e-Commerce king surged more than 75% in just its first day on the NYSE in April and continued to run over 100% in the subsequent weeks. Only Beyond Meat (BYND) and Zoom Video (ZM) had comparable stock trajectories after hitting the market.

The bull thesis for the company was essentially built on the untapped opportunity that Africa provides.

According to the UN, more than half of global population growth between now and 2050 is expected to occur in Africa, with the organization noting that even uncertainty surrounding future fertility rates are unable to temper growth rates.

“The large number of young people currently on the continent, who will reach adulthood in the coming years and have children of their own, ensures that the region will play a central role in shaping the size and distribution of the world’s population over the coming decades,” a UN report reads.

Building on the population stats, McKinsey Global Institute reports indicated that consumer spend on the continent is set to accelerate from $860 billion in 2008 to $1.4 trillion in 2020 and grow from there. Additionally, 36% of the continent’s population is now using the internet regularly, a growth of 10,402% since the dot com bubble 20 years ago in the U.S.

All of these macro statistics are encouraging for essentially the only stock one can play to address the opportunity.

Devils in the Details

As TheStreet noted in its initial report and interview with Jumia CEO Sacha Poignnonec in April, the details of the company’s IPO filings paint an uglier picture.

According to company documents, the business had accumulated losses of €862.0 million since inception.

“Since we were founded in 2012, we have not been profitable on a consolidated basis,” the company stated in an F-1 filing. “There is no guarantee that we will generate sufficient revenue in the future to offset the cost of maintaining our platform and maintaining and growing our business.”

Additionally, the company’s base of Nigeria is well known for corruption and has much of its northeastern territory controlled by a terrorist organization. Not ideal.

The F Word

However, these concerns may pale in comparison to Andrew Left’s most explosive allegations, namely that of securities fraud.

Left points primarily to a confidential investor presentation that does not match up with numbers provided to the SEC for listing requirements.

“In order to raise more money from investors, Jumia inflated its active consumers and active merchants figures by 20-30%,” Left says in his paper decrying the firm’s practices. “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 is screams fraudulent activities.”

His accusation is strengthened by Jumia’s recent amendments to its own SEC filings

“Although we have implemented various measures to detect and reduce the occurrence of fraudulent activities on our platform, there can be no assurance that such measures will be effective in combating fraudulent transactions or improving overall satisfaction among sellers, consumers and other participants,” an amendment states. “Additional measures that we take to address fraud could also negatively affect the attractiveness of our platform to sellers or consumers.”

The filing cites an example in which Kenyan customers fraudulently used electronic payment suppliers to acquire approximately €550,000 in goods in late 2017.

The amendment uses the word fraud a whopping 59 times in total.

In response, the company has stated a plan to implement fraud scoring and risk monitoring processes and software.

“Our in-house fraud team employs a combination of machine learning and rule sets to find an appropriate balance between acceptable risk and a high acceptance rate,” the filing explains. “Our focus on disciplined fraud risk management through our scoring algorithms has allowed us to further reduce the share of bad debts and credit card chargebacks, while at the same time accelerating our growth.”

However, Left argues that the fraudulent activity is systemic, beginning with co-CEO Jeremy Hodara.

Left cites a number of transactions in which Hodara personally acquired four subsidiaries of Jumia for one euro each before selling them back to Jumia in 2018 for undisclosed prices after marking significant losses under his watch. Hodara also sold the company a payroll and support business for an undisclosed sum.

Citron cites multiple police investigations into this type of fraudulent practice among senior officials as evidence that the fraud is endemic.

Accounting Oversight

If all of these issues are present, one must ask how accountants did not catch the issues.

The answer, according to Left, is that they did not look.

“Currently, we lack a dedicated centralized compliance function.” Jumia acknowledged in its F-1 amendment. “However, we recently began implementing a group-wide risk management and compliance program that is aimed at preventing corruption, fraud and other criminal or other forms of non-compliance by our management, employees, consultants, agents and sellers.”

While the step is encouraging, it begs questions of the damage that could have been done while this oversight was non-existent.

So, what of the major auditors that would have had to crack open the books for the NYSE IPO?

In this case, it was Ernst & Young, a big four firm that could provide some confidence in the company’s reporting standards. In fact, CEO Sacha Poignonnec was actually a former employee, adding some more credence to accounting practices.

However, the audit appears to have been cursory at best.

“The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting,” EY stated. “As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.”

Back to square one.

“This is a fraud and deserves immediate SEC attention,” Left argued. “This is the most expensive U.S. listed e-Commerce company with an unviable business.”

At the very least, this will likely be the most incendiary topic for management to discuss during its first ever earnings conference call on May 16.

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