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Luckin Coffee will pay USD 180 million penalty to settle SEC fraud claims

Written by Wency Chen Published on 

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In September, Luckin was fined USD 8.83 million in China.

Luckin Coffee, once a highflying competitor to Starbucks in China, has agreed to pay a USD 180 million fine to settle accounting fraud charges with the US Securities and Exchange Commission (SEC), without admitting or denying the allegations. The settlement is subject to approval by a federal judge.

In April, the coffee chain disclosed an internal investigation into the conduct of former COO Jian Liu, who was believed to have inflated revenues by RMB 2.2 billion (USD 310.5 million), after short-seller Muddy Waters released a report alleging Luckin Coffee’s accounting fraud. Luckin went public on the Nasdaq in May 2019 at an IPO price of USD 17. Its shares now trade in the OTC market for less than USD 4.

According to the SEC, Luckin intentionally fabricated more than USD 300 million in retail sales from at least April 2019 through January 2020. The company was using related parties to fake the sales through three purchasing schemes: Luckin employees inflated expenses by more than USD 190 million, created a fake operations database, and altered accounting and bank records to reflect the false sales. During the period of the fraud, Luckin raised more than USD 864 million from debt and equity investors.

“This settlement with the SEC reflects our cooperation and remediation efforts, and enables the company to continue with the execution of its business strategy,” said Luckin CEO and chairman Guo Jinyi. “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.”

The Luckin scandal raised the awareness of US regulators on Chinese companies listed in the US. Earlier this month, the House of Representatives unanimously passed a bill threatening to delist Chinese companies, including e-commerce giants Alibaba (NYSE: BABA), JD.com (NASDAQ: JD), Pinduoduo (NASDAQ: PDD), and EV maker Nio (NYSE: NIO) from US exchanges if they fail to comply with the inspections from US regulators within three years. It targets the issue that China doesn’t allow inspectors from the Public Company Accounting Oversight Board to review Chinese companies that trade on American markets.

“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 an announcement on Luckin. “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.”

In September, China’s State Administration for Market Regulation announced administrative penalties against Luckin Coffee China, along with 44 third-party companies that played a role in the case, with fines totaling RMB 61 million (USD 8.83 million).

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