Fast-growing Luckin Coffee admits to a massive fraud

The tech-centric coffee chain out of China said it fabricated some of its transactions last year.
Photograph: Shutterstock

Remember when Luckin Coffee was growing at such an exponential rate in China that it was putting Starbucks on its heels?

Yeah, about that.

The coffee chain Thursday admitted that some of its transactions had been fabricated beginning in the second quarter of last year in an extraordinary announcement that sent the company’s shares off a cliff.

The fabricated sales amounted to an estimated $310 million, based on currency exchange rates. That would be about 41% of the $759 million the company was estimated to have generated in sales last year, according to information from financial services site Sentieo.

Luckin’s shares, which are traded in the U.S., fell by more than 70% on Thursday morning.

The Beijing-based company, which opened its first location in 2017 and had 4,500 units by the end of 2019, said it has formed a special committee of its board to oversee an internal investigation over issues discovered during an audit of its financial statements from last year.

According to the company, COO Jian Liu and several employees reporting to him “had engaged in certain misconduct, including fabricating certain transactions.”

The special committee recommended suspending Liu and the employees implicated in the misconduct.

Luckin said that, in addition to the fabricated sales, certain costs and expenses were also inflated. The committee hasn’t independently verified its estimate on the fabrication.

“The company is assessing the overall financial impact of the misconduct on its financial statements,” Luckin said in a statement. “As a result, investors should no longer rely on the company’s previous financial statements and earnings for the nine months ended Sept. 20 and the two quarters starting April 1, 2019, and Sept. 30, 2019.”

Luckin’s admission comes just two months after a noted short seller, Muddy Waters Research, published a “credible” allegation that the company had inflated numbers. The investment firm called it “a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers through cutthroat discounts and free giveaway coffee.”

The allegation led Luckin to vigorously defend its business, arguing that “all of the company’s key operating data” are “tracked in real time and can be verified.” It called the allegations “misleading and false.”

Now, in early April, it appears the investor was correct.

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