LUCKIN COFFEE: Boss to Face Criminal Charges for Financial Fraud

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Caixin Global reports that Lu Zhengyao, chairman of scandal-ridden Luckin Coffee Inc., is likely to face criminal charges in China after authorities discovered emails in which he instructed colleagues to commit fraud, a source close to domestic regulators said.

China’s top market watchdog and Ministry of Finance have found evidence that Luckin, which is listed on the Nasdaq and seen as a domestic challenger to Starbucks Corp., paid taxes on bogus transactions, multiple people close to the company’s internal investigation team told Caixin.

In early April, Luckin admitted to inflating sales by around CNY2.2 billion ($310.7 million) through fabricated transactions for the final three quarters of last year, Caixin recalls. The case triggered a wave of backlash from American regulators and politicians against U.S.-listed Chinese companies, many of which do not grant U.S. audit regulators access to their audit working papers.

Caixin relates that Luckin has initially blamed Chief Operating Officer Liu Jian and several of his subordinates for the fraud. Last month, the coffeemaker fired Liu and CEO Qian Zhiya. Lu, however, has retained his role as chairman.

Although Luckin, which is registered in the Cayman Islands, is not directly subject to the China Securities Regulatory Commission’s oversight, China’s new Securities Law has empowered the securities watchdog to regulate such a company as its operating assets are all in the country, the source close to regulators said, Caixin relays.

According to Caixin, the new Securities Law, which came into effect in March, stipulates that China can hold entities legally accountable for overseas securities trading that disrupts domestic market order or harms domestic investors’ interests.

Luckin’s actions also violate China’s accounting law, the source, as cited by Caixin, said. The law states that companies that produce false accounting reports and those who instruct them to do so will face charges if their misconduct constitutes a crime.

While the Nasdaq told Luckin last month that it would be delisted due to “public interest concerns” raised by the fraud, the company said it planned to request a hearing on the issue, Caixin says.

Caixin notes that Luckin debuted in the U.S. last May with a $561 million IPO only one and a half years after its founding. Like many other Chinese startups, Luckin has relied heavily on a cash-burning subsidy strategy to fund a lightning-fast expansion.

Luckin’s misconduct bears similarities to an incident nearly 10 years ago when a series of scandals prompted investors to short an array of U.S.-listed Chinese companies, a source at a foreign investment bank said. The case reflects long-standing cracks in China-U.S. coordination of financial supervision that offer room for dodgy business practices, the person said, adding that without a resolution for this problem, overseas-listed Chinese companies will always be under a shadow.

About Luckin Coffee

Based in China, Luckin Coffee Inc. (NASDAQ: LK) has pioneered a technology-driven retail network to provide coffee and other products of high quality, high affordability, and high convenience to customers. Empowered by big data analytics, AI, and proprietary technologies, the Company pursues its mission to be part of everyone’s everyday
life, starting with coffee.

As reported in the Troubled Company Reporter-Asia Pacific on April 7, 2020, China Daily said that Luckin Coffee Inc, the so-called rival to Starbucks in China, has exposed itself to the risks of delisting and even bankruptcy due to severe fabrication of sales data, experts said.

China Daily related that the Nasdaq-listed Chinese coffee chain saw its share price crash more than 75 percent to $6.40 on April 2 after the company disclosed that its earnings results were substantially inflated. It dropped nearly 15 percent more in the first two hours of trading on April 3.

Liu Jian, chief operating officer and a director of the company, and several employees reporting to him, had engaged in misconduct, including fabricating transactions, a company statement said on April 2.

The aggregate sales associated with fabricated transactions amount to around CNY2.2 billion (US$310 million) during the April to December period last year, according to Luckin’s preliminary internal investigation, the statement said.

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