Luckin Coffee slips over 75% as internal investigation reveals COO to be involved in fabricating sales

By: Wajeeh Khan
Wajeeh Khan
Wajeeh is an active follower of world affairs, technology, an avid reader, and loves to play table tennis in… read more.
on Apr 3, 2020
  • Luckin Coffee accuses its COO of fabricating sales by a massive £252.90 million in 2019.
  • The coffee company slipped over 75% that wiped out £4.08 billion from its market value.
  • The Starbucks' competitor says it will pursue legal action against the COO and team responsible.

An international investigation at Luckin Coffee (NASDAQ:LK) accused its COO on Thursday of fabricating sales figures in 2019 by a massive £252.90 million.

Following the regulatory filing, China’s largest domestic coffee chain was seen trading over 80% down in premarket trading on Friday. The accounting fraud cost wiped out roughly £4.08 billion from Luckin Coffee’s market value.

Luckin Coffee Immediately Fired The Accused On Thursday

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According to the investigation, chief operating officer, Jian Liu, along with a team of employees who were liable to report directly to him, were found guilty of misconduct involving fabricating sales. All of the accused were immediately fired as the company expressed its plans of pursuing legal action against the charged.

Luckin Coffee was launched in Beijing in 2017. The company aims to compete with Starbucks as the leading coffee chain in China. In its statement on Thursday, the coffee company directed its investors that the prior earnings reports and financial statements for 9 months that ended on 30th September, have been rendered null and void. The company had previously declared £337 million worth of net sales in 2019’s first 9 months.

Luckin also highlighted that its independent auditor is yet to verify the company’s estimate of fabricated sales. Luckin’s special committee approached Kirkland & Ellis as an outside/independent counsel. The company announced FTI Consulting as its independent expert on forensic accounting.

Muddy Waters Research Comments On The Accounting Fraud

The founder of Muddy Waters, Carson Block, commented in an interview with CNBC:

“Luckin shows exactly why we need short sellers in the market. We believed this report was credible when we read it, and that’s why we took a position. This is again a wake-up call for U.S policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our markets.”

Muddy Waters Research had bet against Luckin Coffee in January as it called the business fraud and fundamentally broken. Luckin disregarded the shorter seller’s report as false and misleading.

COO Jian Liu wasn’t available to comment on the recent news.

The domestic coffee chain had priced its shares at £13.87 in the IPO (initial public offering) that raised £457.66 million. Luckin was listed on Nasdaq for public trading that started in May. As of January, the coffee company had climbed to a record-high of £41.92 per share. The stock, however, plummeted in 2020 as the Coronavirus disrupted businesses in China. On Thursday, Luckin dropped to the historically low level of £4.0 per share.

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