China’s Luckin Coffee to Pay $180 Million to Settle Accounting-Fraud Claims

Luckin Coffee Inc.

LKNCY 1.63% LKNCY 1.63

agreed to pay $180 million to settle the regulators’ claims that the company had prepared its financial statements in a way that made growth more sustainable and met its profit goals.

The Securities and Exchange Commission announced the sanction Wednesday, eight months after the Chinese company said some of its employees had made sales in 2019. It is fortunate not only that the claims of the Securities and Exchange Commission filed in the Manhattan Federal Court were not recognized, but also that they were not rebutted. The regulations are subject to the approval of a federal judge.

According to the SEC, between April 2019 and January 2020, Luck intentionally falsified more than $300 million in retail sales, using alleged accounts of individual customers as well as related parties and fictitious companies. The company also manufactured 1.3 billion yen, or $196 million, by paying prices to 13 alleged suppliers of raw materials, personnel and delivery services, the SEC said.

The findings of the Securities and Exchange Commission confirmed the details of the arrangements reported by the Wall Street Journal in May.

Lakin, formerly a competitor of Starbucks Corp. in China, went with the

Nasdaq

The securities market in 2019. The announcement of errors in financial reporting at the beginning of the year led to a decrease of 75% in the company’s shares. This first sheds light on the failure of U.S. regulators to review audits of Chinese companies listed on U.S. stock exchanges, a compliance gap that has caught Congress’ attention this year.

Lakin’s directors and officials are involved in the fraud, according to SEC in his complaint in federal court. The magazine reported that some of the companies involved in the masquerade were related to Luckin’s president and major shareholder at the time,

Charles Lu.

Mr Lu resigned from the Board of Directors of Luckin in July, and the Nasdaq listed Luckin’s shares on 13 July. July. Lucky stocks are still traded over-the-counter.

The Securities and Exchange Commission (SEC) did not announce any enforcement action against these individuals on Wednesday, but said in a press release that its investigation is ongoing. The fraud was uncovered during Luckin’s annual audit, the SEC said in a court case.

In a statement, Mr Lakin said that the agreement reflects his efforts to cooperate and improve. The Board of Directors and management of the Company are committed to implementing a rigorous system of internal financial controls and to adhering to best practices to ensure compliance and good governance of the Company, he said.

Jinyi Gosh,

Lakin, the current president and CEO.

The bank records were modified to hide the misconduct, and the alleged fraud increased Luckin’s revenues by 45 percent in a quarter of 2019, the SEC said.

The alleged sale was part of a disclosure bliss filed with the Securities and Exchange Commission in January 2020, when the company raised an additional $418 million from U.S. equity investors and $446 million from bond investors, SEC said.

In September, the Chinese government sanctioned Luckin Coffee and the companies involved in the fraudulent sales scheme.

At the time of the IPO in 2019, Luckin reported that it operated 2,370 stores in China and served more than 16.8 million customers. The tremendous growth of the company – launched in October 2017 – has resulted in a story that has captivated investors: China was on the eve of an increase in coffee consumption and Luckin had benefited from this development.

But already in April 2019, according to the Securities and Exchange Commission, employees and two companies associated with the managers and directors of Luckin committed fraud by buying coupons for the sale of coffee. The coupons were never used, but Luckin created false client orders to redeem the coupons and justify their use, according to the SEC complaint.

In another transaction that accounted for the majority of the $311 million, certain employees arranged to sell vouchers to shell companies described in Luckin as agents who resell the vouchers to individual customers.

According to the SEC complaint, an employee involved in the fraud sent an e-mail: We will try to replace the contact persons [fictitious agents] with third parties in order to reduce the number of internal colleagues who are aware of such a problem.

E-mail Dave Michaels on [email protected] and Jing Yang on [email protected]

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