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

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

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 30^th 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.