China’s Luckin Coffee pays $ 180 million to handle accounting fraud claims

Luckin intentionally falsified more than $ 300 million in retail sales from April 2019 to January 2020 by using alleged individual customer accounts and related parties and shell companies, the SEC said. The company also concocted 1.3 billion yuan, or $ 196 million, in expenses by paying 13 alleged suppliers of raw materials, personnel and delivery services, the SEC said.

The SEC’s findings confirmed details of the plans reported by The Wall Street Journal in May.

Luckin, once a high-flying competitor to Starbucks Corp. in China, went to Nasdaq Stock Market in 2019. Due to the disclosure of failed financial reports earlier this year, its shares fell 75%. The debacle highlighted the inability of US regulators to inspect audits of US publicly traded Chinese companies, a compliance gap that received attention in Congress this year.

Luckin’s executive officers and senior managers were implicated in the fraud, the SEC alleged in the federal court’s complaint. The Journal reported that some of the companies involved in the bogus plans had ties to Luckin’s then chairman and controlling shareholder, Charles Lu.

Mr. Lu stepped down from the Luckin board in July and the Nasdaq delisted Luckin’s shares on July 13. Luckin’s shares are still traded over the counter.

The SEC did not announce enforcement claims against individuals on Wednesday, but said in a press release that the investigation is continuing. The fraud came to light during Luckin’s annual audit, the SEC’s complaint said.

In a statement, Luckin said the deal was a reflection of the partnership and efforts to improve. “The company’s board of directors and management are committed to a system of strong internal financial controls and adhere to best practices for compliance and corporate governance,” said Jinyi Guo, Luckin’s current chairman and CEO.

Bank records were changed to hide the misconduct, and the alleged cheating increased Luckin’s revenues 45% in a quarter of 2019, the SEC said.

The sham sales were part of the revelations that Luckin filed with the SEC in January 2020, as it raised an additional $ 418 million from U.S. stock investors and $ 446 million from bond investors, the SEC said.

In September, the Chinese government punished Luckin Coffee and companies participating in the fake sales program.

Luckin reported at the time of its IPO in 2019 that it operated 2,370 stores in China and had more than 16.8 million customers. The company’s massive growth – it started operations in October 2017 – drove the story that was attracting investors: China was poised for a boom in coffee consumption, and Luckin was positioned to benefit from serving it.

But company officials were engaged in fraud as early as April 2019, the SEC said, when employees and two entities associated with Luckin’s officers and directors purchased coupons intended to be used for coffee. The coupons were never used, but Luckin “created fake orders from customers to ‘redeem’ the coupons” and justified the recognition of revenue, the SEC complaint said.

In another plan, which accounted for most of the $ 311 million in fake sales, certain employees arranged the sale of coupons to vacant businesses, described within Luckin as agents who would resell the vouchers to individual customers.

According to the SEC complaint, an employee involved in that scam emailed, “We will try to replace the contacts [of the fictitious agents] with third parties, to reduce the number of internal colleagues who are aware of such a problem. ”

Write to Dave Michaels at [email protected] and Jing Yang at [email protected]