NEW YORK (REUTERS, BLOOMBERG) - Shares of Luckin Coffee dived as much as 81 per cent on Thursday (April 2) after the Chinese coffee chain said an internal investigation had shown that its chief operating officer (COO) and other employees fabricated sales transactions.

The company suspended COO Jian Liu and employees reporting to him following initial recommendations from a special committee, which was appointed to investigate issues in its financial statements for the fiscal year ended Dec 31, 2019.

Luckin said the investigation had found that fabricated sales from the second quarter of 2019 to the fourth were about 2.2 billion yuan (S$444 million). That equates to about 40 per cent of the annual sales projected by analysts, according to Refinitiv IBES data.

Liu has been the COO of the company since May 2018. He could not be immediately reached for comment.

China's securities regulator said on Friday it strongly condemns financial misconduct by Luckin Coffee. The China Securities Regulatory Commission (CSRC) also said in a statement it will investigate the issue according to the law and resolutely crack down on securities fraud activities.

Shares of the company were last down 76.3 per cent at US$6.20. They earlier hit a record low of US$4.90.

Luckin, which competes with Starbucks Corp, had been one of China's few successful initial public offerings last year. Its investors include asset management giant Blackrock, Singapore sovereign wealth fund GIC and China International Capital Corp.

The company raised US$778 million from a share sale and a convertible bond offering in early January, according to people with knowledge of the matter. The company also raised US$645 million in its US IPO.

However, there began rumblings that there was something amiss at the company and some investors received an anonymous report alleging that the company was fabricating some numbers.

Earlier this year, short-seller Muddy Waters Research shorted the stock, citing a report alleging that Luckin fabricated financial and operating numbers from the third quarter of 2019.

At the time, Luckin called the report's methodology flawed, the evidence unsubstantiated and said that the allegations were "unsupported speculations and malicious interpretations of event."

"We believed this report was credible when we read it, and that's why we took a position. This is again a wake-up call for US policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our markets," Muddy Waters said in an e-mailed statement on Thursday.

"Luckin shows exactly why we need short sellers in the market."

The funds which invested in Luckin, including Point72 Asset Management, formerly known as S.A.C. Capital Advisors, declined to comment.

Despite the allegations and mandatory closures related to the outbreak of coronavirus, analysts have largely remained optimistic about Luckin. Prior to Thursday's disclosure, six had a buy recommendation on the stock, compared to one hold and zero sell recommendations.

In November, Luckin reported revenue that was six times the year-earlier total. The company, which has reported losses as it engages in a strategy that prioritizes rapid growth, said it was on track to start breaking even at the corporate level in the third quarter of this year.

On Thursday, Luckin asked investors not to rely on its financial statements and earning releases for the nine months ended Sept 30 and the two quarters starting April and July 2019.

The coffee chain, founded in 2017, operated about 4,500 stores by the end of 2019 in China.

China is becoming an important market for coffee retailers as the traditionally tea-drinking nation develops a taste for java. With its growth potential, it's been identified by Starbucks as one of the company's two key markets, along with the US. But Luckin had Starbucks' expansion there clearly in its sights.

"We expect to take over Starbucks as the No. 1 coffee player in China by the end of this year in number of stores," chief financial officer Reinout Schakel said at the time. "We have a very strong brand."