China’s Top Market Regulator Raids Luckin’s Headquarters
China’s securities and market regulators opened a probe into Luckin Coffee, the Nasdaq-listed Chinese coffee chain whose stock collapsed after the company admitted to a massive financial fraud earlier this month.
Officers from the State Administration for Market Regulation visited Luckin’s Beijing headquarters Sunday morning, reviewed documents and questioned employees until the evening, a source at Luckin told Caixin.
In a statement issued Monday afternoon, Luckin said it was cooperating with the investigation and its stores continued to operate normally. The investigators didn’t take any documents or computers from the office, the source said.
A law firm hired by a special committee at Luckin suggested that the U.S. Securities and Exchange Commission request assistance from Chinese regulators in their investigation, the individual said. The China Securities Regulatory Commission (CSRC) is already assisting in the probe of the coffee chain at the request of the SEC, including obtaining and transferring the company’s accounting books to U.S. authorities, the source said.
Meanwhile, Luckin has been conducting its own internal investigation for nearly a month, and no results have been announced.
Luckin, once seen as a rising rival to Starbucks Corp. in China, said earlier this month that its chief operating officer Liu Jian inflated 2019 sales by about 2.2 billion yuan ($310 million).
The matter was raised to the board’s attention during the audit of the company’s consolidated financial statements for 2019 by independent auditor Ernst & Young Hua Ming LLP.
Ernst & Young told Luckin’s audit committee about “suspicious transactions” in mid-March, according to two people close to Luckin’s board. The audit committee immediately notified the board, which then asked management to submit accounting books, but management, including founder and non-executive Chairman Lu Zhengyao failed to provide the books in a timely way, the sources said.
Under pressure from the audit committee, the board formed a special committee and hired law firm Kirkland & Ellis and forensic accounting expert FTI Consulting to conduct the internal probe.
If the SEC accepts the results of the company’s internal investigation, the company is expected to face class-action lawsuits. Law firms in China and the U.S. are recruiting investors who bought Luckin’s stock to participate in lawsuits.
More than 9 billion yuan of cash currently sitting in the company’s accounts will first be used for compensation if it loses in the lawsuits, which is highly likely, said the people close to Luckin’s board.
Luckin Coffee has filed a directors’ and officers’ liability insurance claim worth around $25 million to cover compensation costs, the State Council Information Office disclose at a press conference last week.
Considering that the case is complicated, the investigation is still ongoing and uncertainty exists, the China Banking and Insurance Regulatory Commission (CBIRC) is urging relevant insurance companies to properly handle the claim according to law, Cao Yu, vice chairman of the CBIRC, said at the press conference.
If the SEC is dissatisfied with results of the company’s probe, it could launch a regulatory investigation and ask for more documents from the company.
The CSRC “strongly condemned” Luckin’s accounting fraud in a statement April 3 and pledged to investigate, even though the watchdog has little power to scrutinize or punish the company because the listed entity is incorporated in the Cayman Islands.
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