In April a huge scandal began to unravel that left investors shocked and China in a deeper hole with the SEC.

China’s new company, Luckin Coffee Inc, recorded a valuation of $12 billion only eight months after reopening from the pandemic before revealing that a portion of their sales had been fabricated, according to a report by The Wall Street Journal.

Luckin revealed the fake numbers on April 2, sending their stock plummeting by 75%. The losses affect pensions, mutual and hedge funds, and individual investors in Asia and the West.

The fabrication was due to Luckin’s vouchers, which they sold to companies that were connected to Luckin’s chairman, Charles Lu. These vouchers could be redeemed for millions of cups of coffee and allowed Luckin to write in higher revenue than they were actually bringing in.

The vouchers could also be obtained through the mobile app by their customers in addition to coupons that reduced the price of coffee drinks drastically. All payments were made electronically, and consumers were told their drinks would be delivered within a half an hour.

This method, the company told investors, would allow them to collect data that would help to optimize sales and maximize supply-chain efficiency.

In addition to the vouchers, Lynn Liang, the company’s procurement employee, was in charge of processing $140 million worth of payments for company resources and was falsifying the information that she processed.

Charles Lu responded to the situation, saying, “My style may have been too aggressive, and the company may have grown too fast, which has led to many problems. But I by no means set out to deceive investors.”

On May 11, Jenny Qian, the company’s CEO, and Jian Liu, the company’s chief operating officer, were let go. Six others were suspended or put on leave due to the incident.

Nasdaq has since moved to delist Luckin shares, but the company plans to appeal the decision. The stock did, however, allow American depositories to resume trading after a six-week suspension. The U.S. Securites and Exchange Commission grew angry at not being able to look into Chinese firms’ financial records in order to protect American investors, a frustration that has been present for years.

The SEC has begun warning American investors about the risks associated with investing in Chinese businesses.

However, Luckin didn’t seem like such a risky business to invest in. Seven months after opening its first café in May of 2018, there were 500 stores in different cities. A year later, Luckin’s IPO helped boost the company’s value to about $5 billion.

By November 2019, product sales jumped 558% from third quarter year-to-year numbers.

“It was just explosive, humongous growth, and those numbers were very seductive to a lot of investors,” said John Zolidis, restaurant-industry analyst and president of Quo Vadis Capita.

However, employees for the company had already begun faking transactions to help project more appealing sales numbers around a month before the IPO. Between $28 million to $42 million worth of sales were fabricated by using individual accounts to purchase vouchers.

These vouchers then began being used on a much larger scale, being sold to corporate consumers in bulk. In 2019, Luckin logged $210 million of corporate sales with this method.

Overall, Luckin estimates that up to $310 million worth of its 2019 reported revenue had been falsely recorded.

Luckin responded to the ordeal saying, “The Company continues to take appropriate measures to improve its internal controls and remains focused on growing the business under the leadership of its Board and current senior management team.”

An internal company memo said, “We believe, with the help of all Luckin staff, the company will overcome the crisis and get back on track.”

Read the full report here.


Economics, Finance and Investing