Luckin Coffee’s fraud scandal has led to an internal struggle for power.
The company said on June 26 that it scheduled a meeting for Thursday to consider the removal of Charles Lu as chairman. The proposed resignation and removal was requested by the majority of the board and was based on findings by the special committee, which “based its recommendations on documentary and other evidence identified in its ongoing internal investigation and its assessment of Mr. Charles Zhengyao Lu’s degree of cooperation in the internal investigation.” A Wall Street Journal investigation said Luckin sold vouchers redeemable for tens of millions of cups of coffee to companies with ties to Lu. Those purchases helped inflate revenue.
Previously, Lu scheduled an Extraordinary General Meeting of the shareholders for Sunday to remove himself, Sean Shao, David Li, and Erhai Li and appoint two independent directors. The board is recommending to shareholders to vote against the proposal to remove Shao since he's the chairman of the special committee and his removal would lead to “potential disruption to the ongoing internal investigation.”
The shareholder's meeting was called by Haode Investments, which is controlled by Lu. The two independent director nominees, Ying Zeng and Jie Yang, were nominated by Lu.
In addition to the leadership struggle, Luckin said that it was dropping its appeal against multiple delisting notices from Nasdaq. On Monday, the stock exchange carried out the delisting. The first delisting notice came in May, and gave two reasons for delisting the Chinese coffee chain—public interest concerns because of the fabrication scandal and the company’s past failure to publicly disclose material information. The second notice cited Luckin’s failure to file its annual report.
The brand’s stock closed at $1.38 per share on Friday, a far cry from its record-breaking $12 billion valuation in January.
Luckin’s downward spiral began in late January when short seller Muddy Watters received an anonymous 89-page report alleging numerous examples of wrongdoing by the company. The company denied the accusations, stating “The methodology of the Report is flawed, the evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events.”
Later it was discovered that the report was shedding light on a real problem. Luckin revealed in April an internal investigation which discovered that COO Jian Liu allegedly fabricated $310 million worth of sales. Investigators also found that costs and expenses were inflated. As a result, Liu and CEO Jenny Zhiya were fired. Six other employees who were involved in or had knowledge of the fraud were placed on suspension or leave.
The coffee chain was founded in 2017 and set a goal to overtake Starbucks as the No. 1 coffee chain in China. In three years, the brand exploded and grew past 4,500 locations. Last year, it raised roughly $645 million in an IPO. The company aims to cut out the cashier-customer interaction by handling the purchase process digitally.