Gregor MacGregor, a financier who urged investors to buy bonds issued by a fictional country. Photo: Wikipedia Commons
A scam that took place 200 years ago may still plague us. In 1821, Gregor MacGregor, a Scottish merchant, devised a fraud that has strange echoes today.
MacGregor was the son of a baker from Glengyle, Scotland. He had served in the British Army in Spain and Venezuela. MacGregor, who possessed hypnotic persuasive powers, was swiftly promoted to General. He had hardly seen action, but was given to embellishment.
When he returned to Britain in 1821, MacGregor turned to finance. He claimed that he had been appointed the “Cazique” of Poyais. Poyais was described as a fertile country in Central America. It had three corn harvests a year. Poyais’ river beds were full of gold.
He urged investors to buy bonds issued by Poyais. A pool of US$12 billion ($15.9 billion), in today’s money, was raised. It seemed an ideal investment in an idyllic land.
There was one problem, though. There was no such country. Poyais was a complete fiction invented by MacGregor.
The investors were left in the lurch. Several had even bought land without stepping foot in South America. Others went looking for the fabled land. Most of them died of disease in the jungle.
MacGregor seems to have inspired tech firms. Most of the soaring emerging-market tech companies stress metrics that are not audited.
Instead of profit growth, these companies cite non-financial metrics such as the number of users. If the number of users of a social media platform rises, investors applaud it.
Yalla, a voice-based social media network, is one such company. It was founded in China, but its users are mostly in the Gulf.
Yalla has risen 220% since listing on the New York Stock Exchange last September. It has 16 million users in countries like United Arab Emirates, Saudi Arabia and Egypt. Yalla means “Let’s Go” in Arabic. It collects an average of US$4 per user as fees for games and prizes.
A voice-based social network has a special appeal in the Gulf. WhatsApp and other VOIP (voice over internet protocol) calling platforms are banned in the region. Facebook, Snap and Twitter are heavily policed for political and religious reasons.
Yalla’s founder is Yang Tao, a man with MacGregor’s sense of adventure and gift of persuasion. Like the Scotsman, Yang saw opportunity outside his native country at a young age. He worked for a telecom equipment firm ZTE in the Gulf for six years.
In his travels in the Gulf, he noticed that the Arabs spent many hours speaking on the phone. He sensed an opportunity to build a social network on the basis of voice rather than typing. In just three years, Yang has built and listed a social network. He describes Yalla’s killer app as the virtual recreation of a Majlis. A Majlis is a traditional gathering in the Gulf. Yang attributes its frenetic user growth to local sensitivity. The look and feel of the app is tailored to Arabic speakers. Users are discouraged from discussing politics, religion and other provocative issues. There are content moderators that police discussions.
Last week, Swan Street Research, a short-seller, issued a report against Yalla. It implied that Yalla may have fabricated its user base like MacGregor made up Poyais.
Swan Street disputes Yalla’s claim of seven million monthly active users. This is apparently a fabrication. The actual figure is around 1.5 million.
Swan Street charges that a third of Yalla’s users are bots. Bots are fictitious users created by a computer and not real people. The report quoted unnamed former employees who claim that most of Yalla’s users are “not real/fake/ illegitimate bot accounts”.
The stock has dropped 6% on the back of the report. Swan Street has not provided clinching evidence to discredit Yalla. There is no way to verify their unnamed sources. The report does not provide concrete evidence that most of its users are bots. Yalla has issued a rebuttal of the report.
It is hard to verify either side of the debate. However, investors in the tech space are focused on non-financial metrics, such as growth in the user base. These are more valued than financial metrics like cashflow and operating profits.
Accountants cannot verify non-financial metrics like the number of users. There is no independent way of assessing these figures, as definitions vary. They can be easily manipulated.
There is no substitute for due diligence. Investors in the tech boom should heed the lessons of Poyais. Otherwise, they may get lost in the jungle.