Security & Fraud

Luckin Launches Probe Into Alleged Inflated Revenues

Luckin Coffee

An internal investigation is underway by the board of directors of Luckin Coffee Inc. into its former COO who may have inflated estimated revenues by more than $300 million.

The story, first reported by TechCrunch, revealed the alleged fraud by Jian Liu is believed to have begun in the second quarter of last year.

In a filing with the Securities Exchange Commission (SEC) on Thursday (April 2), the board said the agency should not rely on the company’s recent financial statements, which are believed to be inaccurate.

The coffee giant’s shares sank after Liu and several top employees were suspended for misconduct, according to Yahoo Finance. The stock opened on Thursday at $4.91, down 81 percent from Wednesday’s closing price of $26.20.

The three-person special committee has retained Chicago-based law firm Kirkland & Ellis as counsel and FTI Consulting of Washington, D.C. as forensic accounting expert, according to the SEC filing.

The panel told the board that starting in the second quarter of 2019, Liu, who also served as a company director, and several other employees, had engaged in misconduct, including fabricating certain transactions.

Luckin Coffee, the fastest growing coffee company in China, said if the allegations prove true, it will take legal action against the individuals responsible for the suspected misconduct.

The information identified in the early stage of the investigation indicates that the aggregate sales amount associated with the fabricated transactions was in the second quarter through fourth quarter of 2019.

Certain costs and expenses were also substantially inflated by fabricated transactions during this period, the SEC filing said. As a result, investors should not rely on the firm’s previous financial statements and earning releases for the nine months ended Sept. 30, 2019 and the two quarters starting April 1, 2019 and ended Sept. 30, 2019, including the prior guidance on net revenues from products for the fourth quarter of 2019.

Luckin Coffee launched its IPO in May 2019 with a $650.8 million offering on Nasdaq, just a few weeks after raising a private round of funding from Blackrock.

The company had been known for its stratospheric growth and ample losses. The 2018 numbers, before the alleged fraud detailed by the company, showed $125 million in revenue and $475 million in losses.

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