Luckin Removes Chairman in Controversial Vote

    Some shareholders are objecting to how votes were tallied.

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

    istock/Julien Viry

    Luckin said it’s putting measures in place to prevent misconduct in the future.

    Luckin Coffee reportedly voted to oust four of its board members during a shareholders meeting on Sunday, including Chairman Charles Lu.

    The move was the latest in a series of events for a Chinese coffee chain that continues to suffer the consequences of a substantial fraud scandal.

    Lu scheduled the meeting and proposed the removal of himself, Sean Shao, David Li, and Erhai Li and the appointment of two independent directors. The two independent director nominees, Ying Zeng and Jie Yang, were nominated by Lu. Shareholders are viewing it as a way for Lu to main control via proxies. The proposal was approved despite the board’s recommendation against voting out Shao, who serves as chairman of the Special Committee looking into fraud allegations.

    The vote did not come without controversy. The Wall Street Journal reported that shareholders raised concerns with how votes were counted, including reclassifying supervoting shares to shares with weaker voting rights. Chinese companies with investment in Luckin are challenging the validity of the vote, the Journal said.

    Luckin hasn’t officially announced the results of the meeting, although it’s been widely reported.

    The news comes about a week after Luckin announced it had substantially completed its independent internal investigation into alleged fraud.

    The committee, formed on March 19, poured over 550,000 documents, interviewed more than 60 witnesses, and performed “extensive forensic accounting and data analytics testing.”

    Based on the research, the committee found that fabrication of transactions began in April 2019. Revenue was inflated by roughly $302 million, including $35.6 million in Q2, $99.8 million in Q3, and $166.8 million in Q4. Expenses were inflated by $191 million in 2019, including $21.4 million in Q2, $74.1 million in Q3, and $95.5 million in Q4.

    The committee found evidence that former CEO Jenny Qian, COO Jian Liu, and some employees reporting to them fabricated transactions and that funds supporting the fraud were funneled to Luckin through third parties associated with employees.

    This confirms an investigation by the Journal, which found 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 Lu.

    On July 2, the board held a meeting to remove Lu from the company based on “documentary and other evidence identified in the Internal Investigation and its assessment of Mr. Charles Zhengyao Lu’s degree of cooperation in the Internal Investigation.” However, the proposal failed, leading the company into Sunday’s action.

    Luckin is in the process of eliminating relationships with all the companies involved in the transactions.

    Liu and Qian were fired for their participation as well as 12 other employees who had knowledge of or participated in the fraud. Another 15 workers are facing disciplinary action.

    Luckin said it’s putting measures in place to prevent misconduct in the future. In addition, the company plans to strengthen its compliance training for employees.

    The committee may investigate further if more information becomes available.

    Luckin’s saga began in 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. Then in April, the coffee chain announced it had opened an internal investigation into possible fraud.

    Over the next two months, Luckin received two delisting notices from Nasdaq, citing concerns about the scandal and the company’s failure to file an annual report. Luckin decided to drop its appeal, allowing Nasdaq to move forward with the delisting process.

    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.