Share prices of Chinese coffee chain giant Luckin Coffee plunged by as much as 81 percent on Thursday following the suspension of its chief operating officer for alleged financial misconduct. An internal investigation into the executive's activities showed that he and other employees had fabricated sales transactions for their benefit.
Following the internal investigation, Luckin Coffee COO Jian Liu and other employees that were implicated in the scheme were suspended. Liu has been with the company since May 2018. The suspension was made by a special committee formed by the company tasked with investigating inconsistencies found in its financial statement for its fiscal year ending in December 2019.
The special committee found that sales figures during its second-quarter up to its fourth-quarter were altered to reflect total sales of around $310 million. This was a substantial 40 percent jump from the sales initially projected by analysts for the entire year.
The findings greatly reduced the confidence of investors who had helped the company with its successful initial public offering (IPO) last year. Luckin Coffee, which is directly competing with Starbucks in China, was one of the few companies that had launched a successful IPO thanks to overseas investors that included major hedge funds and investment banks.
According to sources with knowledge of the matter, some investors had begun to question the company's performance following its IPO. Some investors reportedly received anonymous reports alleging that the company may have fabricated some of its numbers.
Earlier in the year, Muddy Waters Research began shorting the stock, stating that it was basing its decision on a report it received alleging that Luckin Coffee's earnings in the third quarter were being intentionally altered. In response to the allegations during that time, Luckin Coffee stated that the report's methodology was flawed and that evidence for the accusations was unsubstantiated. The company even went as far as saying that the accusations were malicious and simply unsupported speculations.
After the findings of the company's internal investigation was made public, Muddy Waters issued a statement on Thursday stating that it believed the report it received a few months ago was indeed credible and that it had made the right call. The short-seller added that the findings should be a wakeup call for US regulators and investigators to be wary of financial reporting fraud.
Luckin Coffee's share prices plummeted to a low of $6.2 per share on Thursday. The company's special committee urged investors not to rely on its financial statements and earnings released for its previous quarters given its recent findings.
