Luckin Coffee to pay US$180 million to settle SEC charges of accounting fraud as it inflated numbers to rival Starbucks
- Luckin Coffee agrees to settlement without admitting or denying wrongdoing
- SEC said Luckin Coffee fabricated more than US$300 million in sales between April 2019 and January 2020
Luckin Coffee agreed to pay US$180 million to settle allegations by the US Securities and Exchange Commission (SEC) that it had engaged in scam accounting to make its financial performance appear healthier than it was.
The start-up based in the Fujian provincial city of Xiamen, which claimed to be China’s answer to Starbucks, was accused by the SEC of fabricating more than 2.12 billion yuan (US$311 million) in retail sales between April 2019 and January 2020, while understating its net loss by as much as 34 per cent. The company also inflated its expenses by more than US$190 million to cover up the fabricated revenues, the SEC said.
The penalty is the biggest meted out to a US-listed Chinese company since executives of Puda Coal were slapped with a US$250 million penalty in 2015 for looting the company.
Luckin agreed to settle the case without admitting or denying wrongdoing. The settlement is subject to approval by court.
The company cast itself as an upstart competitor to Starbucks, expanding at a breakneck pace and offering deep discounts to its Seattle-based rival. A latte was priced 20 per cent cheaper than Starbucks in China. As of January 2020 before its fraud was disclosed, Luckin claimed to have operated more than 4,500 outlets – mostly pickup kiosks for online orders, with no seats – in China, boasting a bigger network than Starbucks.
Luckin’s stock lost 90 per cent of its value, or about US$11 billion, between the time the scandal broke in April and its delisting in July.
In September, China’s top markets regulator fined 45 companies, including Luckin, a combined 61 million yuan over the scandal.
The scandal emerged during the company’s annual external audit, the SEC said, adding Luckin self-reported the misconduct and cooperated in the investigation.
The Luckin scandal helped renew a push by US lawmakers for Chinese companies to share their audit working papers for US oversight to be listed on American bourses.