Chinese Regulators Impose US$9M Fine For Fraud On Luckin Coffee and 43 Implicated Companies

The penalty comes six months after Luckin acknowledged the fraud and more than a month after Chinese regulators concluded their investigation

China’s top commerce watchdog, the State Administration for Market Regulation (SAMR), along with Shanghai and Beijing market regulators, have imposed a fine of RMB 61 million (roughly US$9 million) on Chinese coffee-chain Luckin Coffee and 43 affiliated firms who abetted Luckin in forging sales data, SAMR announced in a statement on Tuesday.

According to the statement, SAMR had launched an investigation into Luckin‘s alleged fraudulent transactions and other unfair competitive practices after Luckin admitted to the wrongdoing in early April.

The fine comes after Chinese regulators concluded their investigation that confirmed Luckin had fabricated $304 million (RMB 2.2 billion) worth of sales transactions, more than a month ago.

The investigation found that Luckin, with the help of a number of third-party companies, inflated sales revenue, costs, and profit margins of related products in 2019, the press release noted.

Moreover, according to the investigation, between August 2019 and April this year, Luckin publicized false marketing data to mislead the public, in violation of the Anti-Unfair Competition Law of the People’s Republic of China, which prohibits the use of false commercial publicity, the statement noted.

A total of 43 third-party companies, including Zhengzhe International Trade (Xiamen), were identified as co-conspirators that colluded with Luckin to spread false marketing materials.

During the investigation, Chinese regulators also discovered emails incriminating Chairman Charles Lu, or Lu Zhengyao, in which he instructed colleagues to perpetuate fraud, and for which Lu could face criminal charges, according to a Caixin Global report.

The Starbucks rival went from being darling to disgraced in less than two years. After bagging a total of $645 million in IPO proceeds at a valuation of $4 billion in May last year, Luckin share prices began plummeting in February following the release of an anonymous report that accused Luckin of inflating sales data.

According to a report by the Wall Street Journal, the anonymous report that wrecked Luckin was published by Snow Lake Capital, although the firm has not claimed its authorship, despite earning a significant portion of its $2.5 billion in assets by shorting Luckin. A full timeline of the scandal can be found here.

Luckin launched an internal investigation into the alleged fraudulent activities to discover the depth and financial implications of the fraud. Based on the investigation, Luckin fired its CEO Jenny Zhiya Qian and COO Jian Liu, along with several employees found complicit in the fraud.

Once a decacorn with a market cap of $12.7 billion, the startup was subsequently delisted from Nasdaq in June, after receiving multiple delisting notices from the U.S. stock exchange and withdrawing its request for a plea hearing.

By that time, the startup’s market cap had been wiped out almost completely, and its share prices had dwindled to $1.39 from its peak of $49.15 in January.

In July, Lu was ousted by board members along with Sean Shao, who was Chairman of the Special Committee that overlooked the Luckin’s internal investigation and a major rival of Lu. However, Shao made a comeback earlier this month, and was reinstated as an Independent Director at board meeting held on September 2.

The F&B startup is still being investigated by the U.S. Securities and Exchange Commission (SEC), China’s Ministry of Finance, which overlooks overseas violations of Chinese Accounting Law, and by its shareholders.

In a press release yesterday, Luckin announced the receipt of the penalty from SAMR and said that it is ‘fully committed to cooperating with the SAMR, and will dedicate all necessary resources to ensure full compliance by the Implicated Companies with the Penalty Decisions’.

The Luckin scandal triggered increased scrutiny of U.S. listed Chinese companies earlier this year, and the U.S. regulators have subsequently tightened listing regulations that could seriously hinder listings of Chinese companies in the U.S. stock exchanges. However, in the short term, it has failed to dampen the enthusiasm of Chinese startups, who continue to line up for U.S. IPOs.

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