Luckin Coffee Fires CEO, COO after Fraud Investigation

    Six others were placed on suspension or leave.

     Street view of Chinese people leaving a Luckin Coffee shop in Wuhan China.

    istock/Julien Viry

    The Wall Street Journal said that Luckin reported a net revenue of 2.93 billion yuan, or $413 million, in the nine months ending September 2019.

    In the wake of a major fraud scandal, Chinese coffee chain Luckin Coffee announced Tuesday that it has fired CEO Jenny Zhiya Qian and COO Jian Liu.

    In April, the company accused Liu of fabricating $310 million worth of sales. The investigation began after questions were raised during an audit. It was discovered that sales between Q2 and Q4 were fabricated and that costs and expenses were inflated.

    The Wall Street Journal said that Luckin reported a net revenue of 2.93 billion yuan, or $413 million, in the nine months ending September 2019, which was up from 375 million yuan, or $5.3 million, in the year-ago period.

    In January, short seller Muddy Waters received an 89-page anonymous report citing Luckin Coffee’s misdeeds. The document claimed the number of items per store was inflated by at least 79 percent in Q3 and 88 percent in Q4, among several other allegations.

    The report described Luckin as a “fundamentally broken business” that was trying to instill the culture of drinking coffee through “cut-throat discounts and free giveaway coffee.”

    At the time, Luckin Coffee vehemently denied any wrongdoing and described the report as flawed, malicious, unsubstantiated, and unsupported.

    Six other employees who were involved in or had knowledge of the fraud were placed on suspension or leave.

    Jinyi Guo, a board member and senior vice president, was named acting CEO. Wenbao Cao, senior vice president in charge of store operations and a former McDonald’s regional manager, and Gang Wu, vice president in charge of strategic partnerships, were added to the board of directors.

    “The company has been cooperating with and responding to inquiries from regulatory agencies in both the United States and China,” Luckin said in a statement. “The company will continue to cooperate with the Internal Investigation and focus on growing its business under the leadership of the Board and current senior management.”

    In just a few years, Luckin—with eyes on challenging Starbucks in China—has grown to more than 4,500 stores. The company went public last year, raising approximately $645 million in the initial public offering. The company aims to cut out the cashier-customer interaction by handling the purchase process digitally. More than 90 percent of its units are pick-up stores around office buildings and universities to target its millennial customer base.

    The company said in April that investors should no longer rely on previous financial statements and earnings releases for the nine months ending September 30, 2019, and the two quarters starting April 1, 2019 and September 30, 2019, including the prior guidance on net revenues from products for Q4 2019.

    Trading in Luckin stock has been suspended since April 7. When the investigation was publicized on April 2, the company’s stock plummeted more than 80 percent.