China’s Luckin Coffee will pay $ 180 million to resolve accounting fraud claims

Luckin intentionally faked more than $ 300 million in retail sales from April 2019 through January 2020 through the use of alleged accounts of individual customers and related parties and businesses of interest, the SEC said. The company also manufactured 1.3 billion yuan, or $ 196 million, in expenses by paying 13 alleged suppliers of raw materials, human resources and delivery services, according to the SEC.

SEC findings confirmed details of the schemes reported by The Wall Street Journal in May.

Luckin, who was a high competitor of Starbucks Corp. in China, it went public on the Nasdaq stock market in 2019. Its disclosure of financial reporting failures earlier this year caused a 75% drop in its shares. The debacle highlighted the inability of U.S. regulators to inspect the audits of listed Chinese companies, a breach of compliance that caught Congress ’attention this year.

Luckin executives and senior executives were involved in the fraud, the SEC alleged in the federal court complaint. The newspaper reported that some of the companies involved in the simulated schemes were related to Luckin’s then chairman and controlling shareholder, Charles Lu.

Lu left Luckin’s board of directors in July and the Nasdaq withdrew Luckin’s shares on July 13th. Luckin shares are still listed for sale.

The SEC did not announce any foreclosure lawsuits against individuals on Wednesday, but said in a press release that its investigation continues. The fraud came to light during Luckin’s annual audit, according to the SEC’s lawsuit.

In a statement, Luckin said the agreement reflected his cooperation and efforts to improve. “The company’s board of directors and management are committed to a system of strong internal financial controls and compliant best practices for compliance and corporate governance,” said Jinyi Guo, current president and CEO of Luckin.

Bank records were modified to hide misconduct and the alleged scam increased Luckin’s revenue by 45% in a quarter in 2019, the SEC said.

The mock sales were part of the disclosures Luckin filed with the SEC in January 2020, as it raised another $ 418 million from U.S. equity investors and $ 446 million from bond investors, he said. the SEC.

In September, the Chinese government sanctioned Luckin Coffee and the companies involved in the counterfeit plan.

Luckin reported at the time of its initial public offering in 2019 that it operated 2,370 stores in China and had more than 16.8 million customers. The company’s strong growth — it began operations in October 2017 — propelled the story that hooked investors: China was preparing for a coffee boom and Luckin benefited from serving it.

But company officials committed fraud in April 2019, the SEC said, when employees and two entities associated with Luckin officers and directors bought coupons that were to be used for coffee. Coupons were never used, but Luckin “created fake customer orders to” change “the coupons” and justify revenue recognition, “the SEC complaint says.

In another scheme, which accounted for most of the $ 311 million in counterfeit sales, some employees organized coupon sales to shell companies, which were described within Luckin as agents who would resell vouchers to private customers.

According to the SEC complaint, a worker involved in this scam emailed: “We will try to replace the contact persons. [of the fictitious agents] with third parties, in order to reduce the number of internal colleagues who are aware of this problem. ”

Write to Dave Michaels at [email protected] and Jing Yang at [email protected]