Luckin Coffee to Pay $180 Million to Settle Accounting Fraud Claims

Luckin intentionally faked more than $300 million in retail sales from April 2019 to January 2020 by using related parties to create fake sales transactions, the SEC said. The Wall Street Journal reported in May that Luckin sold vouchers redeemable for tens of millions of cups of coffee to companies that had ties to Luckin’s chairman and controlling shareholder, Charles Lu.

Luckin, once a highflying competitor to Starbucks Corp. in China, went public on the Nasdaq Stock Market in 2019. Its disclosure of financial-reporting failures earlier this year caused its shares to plummet 75%. The debacle put a spotlight on U.S. regulators’ inability to inspect the audits of American-listed Chinese companies, a compliance gap that gained attention in Congress this year.

Mr. Lu stepped down from Luckin’s board in July, and the Nasdaq delisted Luckin’s shares on July 13. Luckin’s shares still trade over the counter.

The SEC didn’t announce any enforcement claims against individuals on Wednesday but said in a press release that its investigation is continuing. The fraud came to light during the course of Luckin’s annual audit, the SEC’s court complaint says.

In a statement, Luckin said the deal reflected its cooperation and efforts to improve. “The Company’s Board of Directors and management are committed to a system of strong internal financial controls, and adhering to best practices for compliance and corporate governance,” said Jinyi Guo, Luckin’s current chairman and chief executive.

Luckin’s executive officers and senior managers were involved in the fraud, the SEC alleged in its federal court complaint, adding that bank records were altered to hide the misconduct. The alleged cheating inflated Luckin’s revenue by 45% in one quarter in 2019, the SEC said.

The sham sales were part of disclosures that 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, the SEC said.

Luckin reported at the time of its 2019 initial public offering that it operated 2,370 stores in China and had over 16.8 million customers. The company’s tremendous growth—it launched operations in October 2017—drove the story that hooked investors: China was primed for a boom in coffee consumption, and Luckin was positioned to benefit from serving it.

But officers of the company engaged in fraud as early as April 2019, the SEC said, when employees and two entities associated with Luckin’s officers and directors bought up coupons that were meant to be used for coffee. The coupons were never used, but Luckin “created fake customer orders to ‘redeem’ the coupons” and justify the recognition of revenue, the SEC’s complaint says.

In another scheme, which accounted for most of the $311 million in fake sales, certain employees arranged coupon sales to shell companies, which were described within Luckin as agents that would resell the vouchers to individual customers.

According to the SEC’s complaint, one worker involved in that scam emailed: “We will try to replace the contact persons [of the fictitious agents] with third parties, in order to reduce the number of our internal colleagues that are aware of such issue.”

Write to Dave Michaels at [email protected]