Luckin Coffee is filing for bankruptcy as it continues to deal with the fallout from its major fraud scandal.
The company filed under Chapter 15 protection, which shields the Chinese coffee chain from legal action in the U.S. while it restructures debt and continues negotiations with bondholders and shareholders in the Cayman Islands, where it’s incorporated. Once Luckin’s arrangements are approved by the Cayman Islands Court, it will present them to the U.S. court for recognition and enforcement within the U.S.
Luckin said all company stores will remain open for business in China and that proceedings aren’t expected to materially impact day-to-day operations.
“The Company continues to meet its trade obligations in the ordinary course of business, including paying suppliers, vendors and employees,” Luckin said in a statement.
The ordeal began at the end of January 2020 when a detailed, anonymous report alleged that Luckin was committing several counts of fraud. The company vehemently denied the claims at the time. Then in April, Luckin announced that it had opened an internal investigation centered on fabricated sales and inflated expenses.
CEO Jenny Zhiya Qian, COO Jian Liu, and several other employees were fired as a result of the fraud. Chairman Charles Lu was removed from his post, as well.
The SEC accused the company of fabricating more than $300 million in retail sales from at least April 2019 through January 2020. Additionally, Luckin allegedly overstated its revenue by 28 percent in the period ending June 30, 2019, and by 45 percent in the period ending September 30, 2019. During that time, Luckin raised more than $864 million from investors. Some employees tried to conceal the fraud by inflating expenses by more than $190 million, creating a fake operations database, and altering records.
Luckin reached a deal with the SEC to pay a $180 million fine, but without admitting or denying guilt.
The coffee chain was founded in 2017 with the main goal of rivaling Starbucks. In that time, Luckin has opened more than 4,700 locations across China. The chain went public on May 17, 2019, raising roughly $645 million in its IPO. However, due to the fraud allegations, it was removed from the Nasdaq on July 13, 2020.
The brand has attracted customers by offering free vouchers and discount coupons. More than 90 percent of its units are pick-up stores around office buildings and universities to target its millennial customer base.
Despite the controversy, the chain grew net revenue by 35.8 percent for the quarter ending September 30.