Luckin Coffee to pay US$180 million to settle SEC charges of accounting fraud as it inflated numbers to rival Starbucks

Laveta Brigham

Luckin Coffee agreed to pay US$180 million to settle allegations by the US Securities and Exchange Commission (SEC) that it had engaged in scam accounting to make its financial performance appear healthier than it was. The start-up based in the Fujian provincial city of Xiamen, which claimed to be China’s […]

Luckin Coffee agreed to pay US$180 million to settle allegations by the US Securities and Exchange Commission (SEC) that it had engaged in scam accounting to make its financial performance appear healthier than it was.

The start-up based in the Fujian provincial city of Xiamen, which claimed to be China’s answer to Starbucks, was accused by the SEC of fabricating more than 2.12 billion yuan (US$311 million) in retail sales between April 2019 and January 2020, while understating its net loss by as much as 34 per cent. The company also inflated its expenses by more than US$190 million to cover up the fabricated revenues, the SEC said.

The penalty is the biggest meted out to a US-listed Chinese company since executives of Puda Coal were slapped with a US$250 million penalty in 2015 for looting the company.

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“Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors,” said Stephanie Avakian, director of the SEC’s Division of Enforcement 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 persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws.”

The accounting scandal led to Luckin delisting from Nasdaq in July and changes to its board of directors, including the replacement of co-founder Charles Lu Zhengyao as its chairman.

In a complaint filed in US District Court for the Southern District of New York, the SEC accused Luckin of violating fraud, reporting, books and records and control provisions of US securities laws. The SEC did not announce any settlements with individuals and said its investigation was ongoing.

Luckin agreed to settle the case without admitting or denying wrongdoing. The settlement is subject to approval by court.

Luckin Coffee touted itself as a Starbucks competitor in China by rapidly expanding and offering deep discounts. PHOTO: Reuters alt=Luckin Coffee touted itself as a Starbucks competitor in China by rapidly expanding and offering deep discounts. PHOTO: Reuters

“This settlement with the SEC reflects our cooperation and remediation efforts, and enables the company to continue with the execution of its business strategy,” Luckin’s chairman and CEO Guo Jinyi said in a statement. “The company’s board of directors and management are committed to a system of strong internal financial controls, and adhering to best practices for compliance and corporate governance.”

The SEC said the settlement payment may be offset by payments Luckin makes to security holders as part of ongoing provisional liquidation proceedings in the Cayman Islands, where it was incorporated. The transfer of funds to security holders will be subject to approval by Chinese authorities, the SEC said.

Luckin raised US$561 million in its initial public offering in May 2019, surging by up to 43 per cent in its first day of trading. It was one of the largest fundraising exercises by a Chinese company in the US that year.

The company cast itself as an upstart competitor to Starbucks, expanding at a breakneck pace and offering deep discounts to its Seattle-based rival. A latte was priced 20 per cent cheaper than Starbucks in China. As of January 2020 before its fraud was disclosed, Luckin claimed to have operated more than 4,500 outlets – mostly pickup kiosks for online orders, with no seats – in China, boasting a bigger network than Starbucks.

Luckin’s stock lost 90 per cent of its value, or about US$11 billion, between the time the scandal broke in April and its delisting in July.

Luckin said its reconstituted board is committed to “strong internal financial controls” after settling with the SEC. PHOTO: Bloomberg alt=Luckin said its reconstituted board is committed to “strong internal financial controls” after settling with the SEC. PHOTO: Bloomberg

In September, China’s top markets regulator fined 45 companies, including Luckin, a combined 61 million yuan over the scandal.

The scandal emerged during the company’s annual external audit, the SEC said, adding Luckin self-reported the misconduct and cooperated in the investigation.

The Luckin scandal helped renew a push by US lawmakers for Chinese companies to share their audit working papers for US oversight to be listed on American bourses.

This month, the US House of Representatives passed a bill that would force Chinese companies to delist if they fail to turn over their audits for inspection for three years. The bill has moved to US Donald Trump, who is expected to sign it, according to Reuters.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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