The SEC is hitting Luckin Coffee with a $180 million fine after the Chinese coffee chain admitted to fabricating millions of dollars in 2019.
The commission listed the charge as “defrauding investors by materially misstating the company’s revenue, expenses, and net operating loss in an effort to falsely appear to achieve rapid growth and increased profitability and to meet the company’s earnings estimates.”
Luckin agreed to the settlement without admitting or denying the charge.
“This settlement with the SEC reflects our cooperation and remediation efforts, and enables the Company to continue with the execution of its business strategy,” CEO and Chairman Dr. Jinyi Guo said in a statement. “The Company’s Board of Directors and management are committed to a system of strong internal financial controls, and adhering to best practices for compliance and corporate governance.”
The news comes after Luckin formed a committee in March to commence an internal investigation. CEO Jenny Zhiya Qian and COO Jian Liu and a dozen other employees were fired as a result of the scandal.
The SEC accused Luckin of fabricating more than $300 million in retail sales from at least April 2019 through January by using related parties to create false transactions three separate times. An investigation by the Wall Street Journal found that Luckin inflated revenue by selling vouchers redeemable for tens of millions of cups of coffee. Some of the companies that bought the vouchers have ties to former Chairman Charles Lu, who was removed in July.
The company allegedly overstated its revenue by roughly 28 percent in the period ending June 30, 2019, and by 45 percent in the period ending September 30, 2019, in its publicly disclosed financial statements. The SEC said Luckin raised more than $864 million from debt and equity investors during the scheme.
The complaint added that some employees tried to hide the fraud by inflating expenses by more than $190 million, creating a fake operations database, and altering account and bank records.
“Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors,” said Stephanie Avakian, director of the SEC’s Division of Enforcement, in a statement. “While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as U.S. issuers and persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws.”
The SEC said the investigation is ongoing.
The ordeal began in January when short seller Muddy Waters posted an anonymous 89-page report accusing Luckin of several wrongdoings. At the time, Luckin vehemently denied the claims. However, by April, the coffee chain announced it had opened an internal investigation into possible fraud. The Nasdaq delisted Luckin on July 13, but its shares still trade over the counter.
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 has now surpassed 6,500 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.
