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China’s Luckin Coffee to pay US$180 million fine to settle accounting fraud charges

SEC says Chinese company fabricated more than $300 million in sales

Luckin Coffee (Luckin Coffee photo)

Luckin Coffee (Luckin Coffee photo)

TAIPEI (Taiwan News) — Luckin Coffee has agreed to pay US$180 million to settle accounting fraud charges for cooking its books by overstating its 2019 revenue and understating a net loss.

The U.S. Securities and Exchange Commission (SEC) announced the penalty on Wednesday (Dec. 16), eight months after Luckin Coffee revealed that some of its officers fabricated sales numbers in 2019, The Wall Street Journal reported. The Chinese company did not admit or deny the SEC’s fraud allegations, which were filed in Manhattan federal court.

The SEC said it found that the company “intentionally and materially overstated its reported revenue and expenses and materially understated its net loss in its publicly disclosed financial statements in 2019,” Reuters reported. The settlement is subject to a federal judge’s approval.

Luckin Coffee has agreed to pay the penalty, which may be offset by certain payments it makes to its security holders in relation to its provisional liquidation proceedings in the Cayman Islands, per Reuters.

The Chinese coffee company was founded in June 2017 and grew to become a rival of Starbucks in China. However, in early April, the firm announced that as much as US$310 million in 2019 sales were fabricated by its Chief Operating Officer Jian Liu and other employees.

The company, which was delisted from Nasdaq at the end of June, used related parties to make false sales transactions through three separate purchasing schemes, the SEC said. “Luckin employees attempted to conceal the fraud by inflating the company’s expenses by more than US$190 million, creating a fake operations database, and altering accounting and bank records to reflect the false sales,” the agency added.

“This settlement with the SEC reflects our cooperation and remediation efforts and enables the company to continue with the execution of its business strategy,” said Dr. Jinyi Guo (郭謹一), Chairman and Chief Executive Officer of Luckin Coffee, in a statement. He added, “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.”