Security & Fraud

Probe Claims Luckin Coffee Chair May Have Known Of Discrepancies

The head of Luckin Coffee Inc. knew or should have known about the accounting misconduct at the Beijing-based java chain, The Wall Street Journal reported.

An internal report has concluded that Charles Lu, Luckin’s co-founder and chairman, is responsible for fabricated transactions that inflated the Chinese coffee chain’s sales last year, a source told the newspaper.

The report also revealed Lu failed to fully cooperate with the investigation, the source said.

Last week, Luckin completed the investigation that blamed the company’s former CEO and chief operating officer for inflating the embattled Chinese java giant’s revenue and expenses by hundreds of millions of dollars.

China’s Starbucks competitor said former CEO Jenny Zhiya Qian and former chief operating officer Jian Liu and some employees reporting to them took part in a scheme which $300 million in phony coffee sales were put on Luckin’s ledgers in 2019 while the chain’s nearly $190 million in expenses were inflated, the Journal reported. They were fired in May.

The probe was conducted by a panel of Luckin’s board of directors with help from law firm Kirkland & Ellis LLP. It found evidence Lu had knowledge of certain related-party transactions that weren’t properly disclosed, the source told the WSJ.

Lu denied the report in an email to the paper.

“Rumor! Not true!” he said.

A Luckin Coffee spokesman declined to comment.

The three-year-old startup rival to Starbucks Corp. in China was listed on the Nasdaq Stock Market last year. Just 11 months later, Luckin announced more than $300 million of its 2019 sales were fabricated.

Since then, its market capitalization has fallen below $1 billion, from more than $12 billion in January, the newspaper reported.

Last week, Luckin said sales were inflated from April 2019 through the fourth quarter.

The company didn’t detail Lu’s role in the scheme, but said directors proposed to remove him at a board meeting last week based on “documentary and other evidence identified in the Internal Investigation and its assessment of [his] degree of cooperation in the Internal Investigation.”

The investigation was launched in April after Luckin’s board of directors was notified of potentially fabricated transactions that inflated estimated revenues by more than $300 million.

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