China’s Luckin Coffee to pay a $ 180 million fine to settle a fraud case

People wearing face masks walk past a Luckin Coffee shop in Yichang, Hubei province, China on June 29, 2020.

Liu Junfeng | VCG | Getty Images

Luckin Coffee has agreed to pay a $ 180 million fine to pay accounting fraud charges for “intentionally and materially” exaggerating revenue for 2019 and underestimating a net loss, US regulators said Wednesday.

The U.S. Securities and Commission (SEC) fine for Starbucks’ China-based rival comes after it said earlier this year that much of its sales were manufactured in 2019, causing its shares to plummet and an investigation by the Chinese securities regulator and the SEC started.

The SEC said it found that Luckin “intentionally and materially overestimated reported revenues and expenses and materially underestimated the net loss in its publicly disclosed financial statements in 2019.”

Luckin has not admitted or denied the charges, the SEC said. The company has agreed to pay the fine, which may be offset by certain payments to its security holders in connection with its preliminary winding-up proceedings in the Cayman Islands.

“This settlement with the SEC reflects our partnership and recovery efforts, and allows the company to continue executing its business strategy,” said Dr. Jinyi Guo, Chairman and Chief Executive Officer of Luckin Coffee, said in a statement.

“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,” added Guo.

The transfer of money to the security holders is subject to approval by the Chinese authorities.

“Public issuers who have access to our markets, wherever they are located, must not provide false or misleading information to investors,” Stephanie Avakian, the SEC’s director of enforcement, said in a statement.

“While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as US issuers and individuals, we will continue to use all of our available resources to protect investors when foreign issuers violate federal securities laws,” she said.

Founded in June 2017, Luckin had one of the most successful IPOs in the US by a Chinese company last year and caught the attention of prominent US investors including long-only funds and hedge funds.

But Luckin said in early April that a whopping 2.2 billion yuan ($ 310 million) in revenue was concocted last year by its Chief Operating Officer Jian Liu and other staff, who were suspended while the company conducted its investigation.

The falsified numbers correspond to about 40% of Luckin’s annual sales predicted by analysts, according to data from Refinitiv IBES.

The Xiamen-headquartered company, which parted ways with Nasdaq in late June over the accounting scandal, used related parties to create false sales transactions through three separate purchase arrangements, the SEC alleged.

“Luckin employees tried to hide the fraud by increasing operating costs by more than $ 190 million, creating a bogus operations database and adjusting accounting and banking records to reflect the false sales,” the agency found.

Furthermore, the SEC alleges that Luckin raised more than $ 864 million from debt and equity investors during the period of the fraud.