WASHINGTON (BLOOMBERG) - Luckin Coffee's collapse from a stunning accounting scandal has prompted a stiff price tag from US regulators: US$180 million (S$239 million).
The Chinese coffee chain intentionally fabricated more than US$300 million in sales from at least April 2019 through January of this year, according to the Securities and Exchange Commission, which announced the fine and a settlement with the company on Wednesday (Dec 16). To conceal the fraud, certain employees created a fake operations database, and altered bank records to reflect the bogus sales, according to the SEC.
Luckin's alleged malfeasance, which involved misstating its revenue, expenses and operating loss, was all done to give investors the false impression that the company was experiencing miraculous growth, the agency said.
The facade came crashing down in April when Luckin said that its chief operating officer and some subordinates might have faked more than a quarter's worth of business. By mid-June, the company had plunged more than 90 per cent on the Nasdaq stock market, erasing more than US$11 billion of market value. Nasdaq announced it was de-listing Luckin that same month.
"Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors," Stephanie Avakian, head of the SEC's enforcement division, said in the statement.
Luckin's 2020 collapse has led to renewed scrutiny of Chinese companies that sell shares on US exchanges without adhering to rules that require their audits be inspected by American regulators. The fallout also triggered fresh concerns for global investors about China's corporate governance, while contributing to the US Congress passing legislation this month that could lead to Chinese businesses being kicked out of American markets.
In its statement, the SEC said the US$180 million fine may be offset by payments that Luckin makes to its security holders as part of its liquidation proceeding in the Cayman Islands. The transfer of funds to Luckin investors is subject to approval by Chinese authorities, the SEC said.
"This settlement with the SEC reflects our cooperation and remediation efforts, and enables the Company to continue with the execution of its business strategy," Luckin Chairman and Chief Executive Officer Jinyi Guo, said in a regulatory filing.
Luckin, founded in 2017, operated about 4,500 stores by the end of last year in mainland China. The chain pulled in customers by offering massive discounts and sought to reach 10,000 locations by the end of 2021. It was trying to overtake Starbucks by opening more stores in China in two years than the industry giant had in two decades.
The settlement, which Luckin agreed to without admitting or denying the regulator's allegations, is subject to court approval.