Chinese coffee company Luckin Coffee has fired its chief executive officer (CEO) and chief operating officer (COO) following an accounting scandal.
Luckin Coffee CEO Jenny Zhiya Qian and COO Jian Liu were fired on Monday after they were found to have fabricated sales reports. A filing by Luckin with the US Securities and Exchange Commission (SEC) indicated that Liu was the one who designed the scheme.
The company appointed Jinyi Guo, a senior vice president and board director, as acting CEO.
Accounting Fraud
On April 2, the coffee company announced that it suspended Lu after discovering he and several of his direct reports "had engaged in certain misconduct, including fabricating certain transactions."
The fabricated reports amounted to around 2.2 billion yuan or approximately $310 million from the second quarter to the fourth quarter of 2019.
The disclosure of the regulatory filing led to over 80% crash in premarket trading. Shares have been reportedly down nearly 72%, sweeping away nearly $5 billion from its market value.
Based on the investigation, Luckin’s COO and the employees he supervised, had connived to carry out a misconduct, including altering sales records. Liu and the employees involved in the impropriety have been suspended. Luckin Coffee said it will pursue legal action against those responsible.
Betting against Luckin
In January 2020, Muddy Waters Research said that it bet against the stock due to the fraud and a “fundamentally broken business.”
Luckin responded by calling the short seller’s report “misleading” and “false.”
“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,” Muddy Waters founder Carson Block wrote in a statement sent to CNBC.
“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.”
After pricing shares at $17, the Chinese coffee company raised $561 million in its initial public offering. The stock started trading publicly on the Nasdaq in May, soaring to 18% in its launch.
Luckin Coffee's Future
There remains an uncertainty surrounding the future of the Chinese coffee company. Following Luckin's disclosure of the fabricated sales reports, its shares were halted on the Nasdaq.
As a result of the probe's announcement, its shares fell by as much as 75% in early April and has not traded since.
Luckin's stock was trading at $4.39 a share before it was halted for trading, which was almost 75% below its $17 IPO price. This also respresented an over 90% decline from its January peak of just above $51.
KeyBanc Capital Markets downgraded Luckin stock when the fake data news broke.
“Following our conversation with the Company, we believe earnings visibility will be limited for the foreseeable future and it will take management several years to repair their credibility,” analysts led by Eric Gonzalez wrote.
“Previously released financial statements and guidance can no longer be relied upon by investors, which likely calls into question the Company’s overall liquidity.”
There are rumors that it may possibly be delisted and the company would eventually file for bankruptcy.
However, some Chinese consumers are continuing to express their support towards Luckin. According to mobile data analytics company Apptopia, downloads of the Luckin app on Apple's app store achieved a daily record shortly after the scandal broke.
A Quartz report also indicated that there was strong support for Luckin among Chinese consumers on Chinese social media site Weibo.
