One of the more interesting developments in the financial markets this year has been the number of so-called “unicorns” that have completed their IPOs. Among others, Uber, Lyft and Pinterest made their debut in recent weeks. Some of these companies have stumbled as they began trading, and indeed some have already been sued in securities class action lawsuits (as I noted here with respect to Lyft). Among the companies completing IPOs in recent weeks is Jumia Technologies AG, an African e-commerce platform that has been called Africa’s first unicorn, whose American Depositary Shares began trading on the NYSE on April 12, 2019. Even though Jumia’s securities have been trading barely a month, the company has been hit with a securities lawsuit, following a short-seller’s report about the company.
Jumia is based in Berlin, Germany. Jumia conducts an e-commerce platform that delivers services in 14 African countries. Among other things, the company provides a marketplace that connects sellers with consumers; a package and delivery service; and a payment service.
In March 2019, Jumia filed a registration statement with the SEC in order to conduct a public offering of its ADSs in the U.S.. The SEC declared the registration statement effective on April 10, 2019. The company sold over 15.5 million shares in its offering at a price of $14.50 per ADS. On April 12, 2019, the company’s ADSs began trading on the NYSE. In the trading days following the debut, the ADSs’ price rose, reaching as high as $46.99 per ADS on May 1, 2019.
The Citron Research Report
On May 9, 2019, the investment research firm and short-seller Citron Research published a report about Jumia (here). The dramatically written report does not mince words. The report declares on its cover page that “Jumia is a fraud.” The report declares that “investors cannot rely on reported numbers.”
The report claims that there are material discrepancies between the financial information Jumia reported in its registration statement and information contained in a confidential internal report prepared in connection with an October 2018 fund raising effort. The Citron report claims that among other things the registration statement inflated the number of Jumia’s customers and of its merchants. The report also claims that the registration statement omitted information about the number of orders that returned, not delivered, or cancelled. The report also quotes local press allegations of alleged fraudulent activity by company representatives and claims that company executives engaged in related-party transactions.
The price of Jumia’s ADSs declined 28% over the two trading days following the report’s publication, closing on the second day after publication at $24.50 per ADS. In an earnings call days after the report’s publication, the company’s CEO said, among other things, “We completely stand by our Prospectus.” The CEO also called the Citron report “a collection of very selective and biased facts.”
On May 14, 2019, an individual Jumia shareholder filed a securities class action lawsuit in the Southern District of New York against Jumia and three of its executives, on behalf of a class of investors who purchased Jumia’s ADSs between April 12, 2019, when Jumia’s ADSs began trading, and May 9, 2019, the day of the Citron Research report.
The plaintiff’s complaint, a copy of which can be found here, quotes extensively from the Citron Research report. As described in the plaintiff’s counsel’s May 14, 2019 press release (here), the complaint alleges that the defendants “failed to disclose that: (a) Jumia had materially overstated its active customers and active merchants; (b) Jumia’s representations about its orders, order cancellations, undelivered orders and returned orders lacked a sufficient factual basis and materially overstated the Company’s sales; (c) Jumia failed to sufficiently disclose related party transactions; and (d) Jumia’s financial statements were presented in violation of applicable accounting standards.”
The complaint alleges that the defendant’s participated in a “fraudulent scheme” that: “(i) deceived the investing public regarding Jumia’s business, operations, services, markets, management, sales and cost trends, demands, present and future business prospects, and the intrinsic value of Jumia ADSs; (ii) enabled the Company to conduct its IPO and sell ADSs pursuant thereto at an artificially inflated price; and (iii) caused Plaintiff and the Class to purchase Jumia publicly-traded ADSs at artificially inflated prices.” The complaint alleges that the defendants violated Sections 10(b) and 20 of the Securities Exchange Act of 1934.
The securities lawsuit against Jumia was filed barely a month after the company’s shares began trading. That certainly is quick — but not quite as quick as the lawsuit that was filed against Lyft. As discussed here, the Lyft lawsuit was filed just 13 trading days after the company’s debut. The Jumia lawsuit was filed 22 trading days after the company’s shares began trading.
Although the lawsuits against Lyft and Jumia both were filed shortly after each company’s IPO, there are important differences between the two lawsuits. Reflective of the securities litigation exposure that IPO companies now face in the wake of the U.S. Supreme Court’s Cyan decision, the Lyft lawsuit was filed in state court. The Jumia lawsuit was filed in federal court.
There is a very basic reason that the Jumia lawsuit was not filed in state court. The concurrent state court jurisdiction that the U.S. Supreme Court recognized in Cyan only applies only to liability claims under the ’33 Act. There is no concurrent state court jurisdiction for liability claims under the ’34 Act. The Jumia complaint does not contain liability claims under the ’33 Act, it only alleged violations of the ’34 Act, and that is why the Jumia lawsuit is in federal court.
There is a simple reason that the Jumia lawsuit does not allege a ’33 Act violation, and that is that the company’s ADSs are still trading above the offering price. The company’s ADSs were offered at $14.50 per ADS. At the end of the class period, the company’s ADSs were trading $24.50 per share, $10 above the offering price. Indeed, as of the market close on May 17, 2019, the shares were still trading just under $20 per ADS. Because the company’s ADS price remains above the offering price, the plaintiff is unable to allege Section 11 damages.
There is another reason the lawsuit against Jumia is noteworthy, and that is because it involves a non-U.S. company. The securities litigation exposure of U.S.-listed non-U.S. companies has been a hot button issue lately. Indeed, as I discussed in a recent post (here), due to increasing concerns about the non-U.S. companies’ securities litigation exposure, D&O insurance premiums for these companies has been soaring. The non-U.S. companies increased D&O insurance cost was also the subject of a recent Wall Street Journal article (here).
The fact is that non-U.S. companies face a greater risk of securities class action than domestic U.S. companies. As NERA Economic Consulting noted in its 2018 report on securities class action litigation (here, page 8), for eight years in a row, the percentage of U.S. securities lawsuits filed against non-U.S. companies has been greater than the percent of U.S. listings than non-U.S. companies represent. Indeed, for the years 2004-2018, non-U.S. companies have only represented about 17% of all U.S. listed companies, but lawsuits against non-U.S. companies have represented over 20% of all U.S securities class action lawsuit filings.
While the fact that Jumia is a non-U.S. company arguably represents a securities litigation risk factor, the risk factor that more likely explains the new lawsuit is the fact that Jumia recently completed an IPO. As Cornerstone Research detailed in its 2018 securities litigation report (here, pages 24 and 25), companies that have recently completed IPOs face a steeper risk of securities litigation that do more mature companies. And, though the Jumia lawsuit did not involve a Section 11 claim, there is a correlation between the level of IPO activity and the number of Section 11 lawsuit filings.
All of that said, there are important differences between Jumia and other IPO companies that wind up in litigation. That is that Jumia’s current ADS price remains well above its offering price. The typical situation where an IPO company gets hit with a securities lawsuit is when the company’s share price tumbles after it begins trading. That is what happened with Lyft, its share price has fallen sharply since the company’s IPO. (Of course, not all IPOs whose share prices decline get sued right away; Uber’s share price has declined since its IPO, and at least so far it has not been hit with a securities suit). That is, while Jumia has characteristics that translate into heightened securities litigation exposure, it is still a little unusual under the current circumstances that Jumia has been hit was a lawsuit.