Financial analysts say the $9 million fine meted out to Luckin Coffee Inc. and others is just the tip of the iceberg.
The State Administration for Market Regulation fined Luckin Coffee and 43 companies it colluded with 61 million yuan ($8.94 million) for deliberately misleading consumers and investors in a bookkeeping fraud.
Paying The Piper
According to the usual procedures of the U.S. Securities and Exchange Commission and Public Company Accounting Oversight Board in handling fraud cases, the punishments, fines and compensation Luckin faces in the U.S. may outweigh those imposed by China's authorities, analysts said.
Lawyers said accountants involved would be prohibited from working professionally for a maximum of five years and Luckin's tax bracket would be downgraded.
Conspiracy Exposed
Between April and December last year Luckin orchestrated a group of companies to falsely inflate its sales, operation costs and profit margins to gain competitive advantages. Several Beijing-based subsidiaries of UCAR Inc., where former Luckin chairperson Lu Zhengyao was president and CEO, were involved.
The extent of the fraud was said to be $300 million.
From August 2019 to April Luckin relied on several channels to showcase its false marketing information - violating China's Anti-unfair Competition Law, the state administration said. The administration didn't disclose details of the fines imposed on each company.
Luckin responded on social media saying it respected the authority's decision and would make changes to secure a stable business.
China's Finance Ministry has been investigating since May the false-accounting accusations made in an online report in January by U.S.-based short seller Muddy Waters Research.
Luckin Coffee, from April 2019 to December, disclosed 2.246 billion yuan in fabricated transactions by means of a fictional "commercial coupons," 2.119 billion yuan in fabricated revenues, 1.211 billion yuan in fabricated operation costs and 908 million yuan in fabricated profit margins, the ministry said.
Luckin reported it hadn't received any punishment notice from the ministry.
The Beat Goes On
Right after its announcement in late June that it was delisting from Nasdaq, Luckin was plunged into internal strife - including a board of directors' revamp.
In early July it ousted joint founder and chairperson Lu Zhengyao and replaced him with Jinyi Guo, who was formerly Lu's assistant at UCAR Inc. Former CEO Qian Zhiya and former chief operating officer Liu Jian were removed from the board and five independent directors joined. However, as of Aug. 3, Luckin said it had received resignation letters from two new independent board directors and had to restructure the board again.
Analysts said Luckin was not only saying farewell to the "Lu Zhengyao Era" but trying to draw a line under its former backer UCAR Inc. - a car-rental company where several former Luckin leaders were employed.
UCAR Inc. was accused of illegal disclosure of information by the China Securities Regulatory Commission. Because it failed to publish its 2019 annual report by the end of August the company faced delisting from the new over-the-counter market from Sept. 1, the commission said.
Luckin said its 4,000 stores across China were still open and it expected to post a profit in 2021. Luckin's stock on the OTC market was last trading at $2.77 per share.
