Luckin Coffee to pay US$180m penalty to settle accounting fraud charges

Luckin Coffee Inc has agreed to pay a US$180 million penalty to settle accounting fraud charges for “intentionally and materially” overstating its 2019 revenue and understating a net loss, US regulators said on Wednesday.

The US Securities and Commission fine on the China-based rival of Starbucks comes after it said earlier this year that much of its 2019 sales were fabricated, sending its shares plunging and sparking an investigation by China’s securities regulator and the SEC.

The SEC found that Luckin “intentionally and materially overstated its reported revenue and expenses and materially understated its 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 penalty, which may be offset by certain payments it makes to its security holders in connection with its provisional liquidation proceeding in the Cayman Islands.

Founded in June 2017, Luckin had one of the most successful US IPOs by a Chinese company last year, attracting interest from prominent US investors.

But Luckin said in early April that as much as 2.2 billion yuan (US$310 million) in sales last year were fabricated by its Chief Operating Officer Liu Jian and other staff, who have been suspended. The Xiamen-headquartered company, which delisted from Nasdaq at the end of June, used related parties to create false sales transactions through three separate purchasing schemes, the SEC alleged.

“Luckin employees attempted to conceal the fraud by inflating the company’s expenses by more than US$190 million, creating a fake operations database, and altering accounting and bank records to reflect the false sales,” it said.

Further, the SEC alleged that during the period of the fraud, Luckin raised more than US$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,” Guo Jinyi, chairman and chief executive officer of Luckin Coffee, said in a statement.