Luckin Coffee, China's answer to global coffee chain giant Starbucks, is now in danger of being delisted and potentially even going bankrupt after an investigation discovered that its chief operating officer and several employees had intentionally fabricated sales data.
Share prices of the Chinese coffee chain operator, which is currently listed in the US under the NASDAQ, plummeted by more than 80 percent last week following the news and the suspension of the company's COO, Liu Jian. The executive along with several employees were accused of engaging in financial misconduct involving the fabrication of transactions to bolster the company's financial statements.
The faked transactions falsely inflated the company's earnings for April up to December of last year. The aggregated sales that were fabricated reported amounted to around 2.2 billion yuan or roughly around $310 million. The discovery was made through an internal investigation conducted by the company after it had received reports of possible fraud in its financial statements.
Several investors reportedly pointed out to the company the immensely inflated figures for the three quarters, which were 7.8 times larger than the figures it had previously reported over the same period in 2018. Following the release of its findings, the company instructed investors to no rely on its financial statements during that time.
In response to the news, the China Securities Regulatory Commission stated that it will be looking into the company's activities, which it said has caused deep concerns. Analysts have pointed out that Luckin Coffee could be facing devastating consequences that will go beyond merely being delisted in the US.
It is likely possible that investors will launch a class-action lawsuit against the company for misreporting its earnings. This could lead to the Chinese firm paying hefty compensations that may result in its bankruptcy. However, the largest impact of the recently discovered fraud will likely be the tarnishing of the integrity of Chinese companies listed both domestically and abroad and the dilution of trust by international investors. This could lead to substantial challenges for other Chinese firms looking to list their company aboard.
Apart from the civil compensation it will likely be forced to pay, Lucking Coffee could also be facing administrative and criminal fines stemming from its misconduct. Those responsible for the fabrication will likely be also sent behind bars.
Luckin Coffee, specifically those that conducted the fabrication, likely wanted t to artificially inflate revenues to allow the company to more easily get access to capital market refinancing to support its rapid expansion plans. Last year, the company officially overtook Starbucks to become China's largest coffee chain.
