The fake traffic scandal at short-lived Wall Street darling Luckin Coffee has cost the company’s top two executives their jobs and led to the suspension of six other employees.
The Beijing-based company, which is publicly traded in the U.S., said Tuesday that it terminated CEO Jenny Zhiya Qian and Chief Operating Officer Jian Liu and demanded their resignations from the board.
Liu, previously said to have led the effort to fabricate transactions, had earlier been recommended for a suspension.
The company also said it suspended or put on leave six other employees who were either involved in or knew about transactions at the company being fabricated to make it look far more successful than it really was.
Luckin said it made the decision after an ongoing investigation by a special committee of the board of directors set up to look into the problem, which has rocked the company and sent its shares plummeting.
“During its ongoing internal investigation, the special committee of the board has brought to the attention of the board evidence that sheds more light on the fabricated transactions,” the company revealed last month. The board then fired the executives “after considering such information.”
The company has appointed Jinyi Guo, a board member and senior vice president of the company, to be its interim CEO.
The firings continue a remarkable downfall for a chain that emerged just three years ago and, by the end of 2019, had more coffee shops than any other coffee concept in China. For a time, it had Seattle-based coffee giant Starbucks on its heels. It had a successful initial public offering last year and talked about exploring new markets.
Luckin had 4,500 locations by the end of 2019.
Yet questions about the veracity of the company’s sales and traffic data began to emerge in early February, when short-seller Muddy Waters Research published an anonymous but “credible” allegation that the company had inflated its numbers.
That report called Luckin “a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers through cutthroat discounts and free giveaway coffee.”
Luckin vehemently denied the report, yet two months later, it dropped a bombshell by acknowledging a massive fraud that significantly inflated the company’s numbers last year. An estimated $310 million of the chain’s sales were fabricated beginning in the second quarter—or 41% of Luckin’s projected $759 million in sales for 2019, according to estimates on financial services site Sentieo.
Luckin’s shares fell more than 18% on Tuesday. The company’s share price has lost nearly 90% of its value this year.
Luckin on Tuesday appointed Wenbao Cao and Gang Wu to be directors. Cao is a senior vice president of the company and a former executive with McDonald’s China. Wu is another senior vice president who has led supply chain management and previously held positions with various airlines in China.