Caixin
Jul 02, 2020 07:07 AM
BUSINESS & TECH

Luckin Coffee Probe Confirms Scope of Financial Reporting Fraud

picture
picture

What’s new: Luckin Coffee substantially completed its independent internal probe into its financial reporting fraud scandal, confirming billions of yuan of fake sales and firing six more employees, the company said Wednesday. But it provided no conclusion on whether co-founder and Chairman Lu Zhengyao was culpable.

The independent investigation by a special committee found that the Chinese coffee chain’s 2019 sales were inflated by 2.12 billion yuan ($300 million) and expenses by 1.34 billion yuan ($190 million). The figures were largely in line with what the company first acknowledged in April.

Available evidence showed that former Chief Executive Officer Qian Zhiya, former Chief Operating Officer Liu Jian and other employees under instructions from the CEO and COO fabricated transactions and used third parties with ties to company employees to funnel funds to support the falsified transactions, Luckin said.

The special committee found that some of the third-party companies are controlled by Wang Baiyin, a schoolmate of Lu’s, but the investigation didn’t find cash transactions between Luckin and those companies. The committee didn’t have authority to inspect outside companies’ books, Luckin said.

What’s more: On recommendation of the special committee, Luckin’s board will hold a special meeting Thursday to consider whether to fire Lu as chairman. The special committee said the proposal was based on the documents and evidence it found in the probe and the degree of Lu’s cooperation.

People close to the special committee told Caixin that Lu didn’t hand over his cellphone and computer to investigators and refused to cooperate with the investigation. Another person close to Luckin’s board said Lu might give up the chairmanship in exchange for a reshuffle of the board.

Lu currently controls about 45% of the company’s voting power. He would need support from shareholders with at least 5% of voting shares to call a special shareholder meeting to reshuffle the board. The person close to the board said Lu is scrambling to contact such shareholders.

Luckin’s American depositary shares were suspended from trading Monday, pending delisting procedures after the company received two delisting notices from the Nasdaq stock exchange because of the sales reporting fraud and failure to file the annual report.

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full Caixin article in Chinese, click here.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

You've accessed an article available only to subscribers
VIEW OPTIONS
Share this article
Open WeChat and scan the QR code