Caixin
Aug 04, 2020 04:25 AM

Two Luckin Coffee Affiliates Fined by CSRC for Disclosure Violations

Ucar Inc. acquired a majority stake in Borgward Automotive China in early 2019 but failed to consolidate it into financial results.
Ucar Inc. acquired a majority stake in Borgward Automotive China in early 2019 but failed to consolidate it into financial results.

China’s securities regulator fined scandal-plagued Luckin Coffee Inc. founder Lu Zhengyao and two companies he controls for violations of disclosure requirements.

Ucar Inc., a limousine services company controlled by Lu, was fined 500,000 yuan ($71,600) because it failed to consolidate the results of Borgward Automotive China Co Ltd. in first-quarter and first-half financial reports last year. That violated information disclosure rules, the China Securities Regulatory Commission (CSRC) said. Ucar acquired 67% of Borgward in January 2019.

In addition, Qwom Digital Technology Co. Ltd., a marketing company controlled by Lu that provides advertising services to Luckin, was fined 300,000 yuan for failure to disclose related-party transactions with Luckin, the CSRC said.

Lu, as chairman and controlling shareholder of Ucar, was fined 200,000 yuan, and four other senior executives were also penalized. Lu, who is also known as Charles Lu, was fined 100,000 yuan for his role in Qwom.

Those penalties will be on top of whatever punishment national regulators decide to impose on Luckin Coffee after official investigations confirmed that the coffee chain fabricated hundreds of millions of dollars in sales.

Following its Borgward acquisition, Ucar underreported at least 9.6 billion yuan of assets, more than half of total assets, for the 2019 first quarter, the CSRC said. For the first half that year, at least 10 billion yuan of assets, or 64% of total assets, were not included in financial reports, the commission found.

Listed companies usually fail to consolidate acquired businesses after acquisitions out of concern that the acquired companies’ poor results could hurt the parent companies’ earnings, a partner at a large law firm told Caixin. Sometimes, listed companies may have agreed with the acquired companies’ shareholders to temporarily keep the companies under the selling shareholders’ names, the lawyer said.

Borgward reported a net loss of 275 million yuan in 2017, and the loss widened to 1.65 billion yuan as of Aug. 31, 2018, Ucar said in a statement when it acquired the stake.

Borgward became a subsidiary under the control of Ucar in the third quarter of 2019 after the acquisition was completed July 29 that year, according to Ucar.

Qwom had 42.6 million yuan of related-party transactions with Luckin in 2017 and 58.5 million yuan in 2017, accounting for more than half its total assets in those years, the CSRC said.

The Ministry of Finance and the State Administration for Market Regulation recently concluded a separate three-month investigation into Luckin Coffee, its affiliates and 23 financial institutions involved in the financial fraud. Both regulators said they will impose penalties without giving further details.

Lu, who was ousted as chairman of Luckin, is also likely to face criminal charges in China after authorities discovered emails in which he instructed colleagues to commit fraud, Caixin previously learned from a source close to domestic regulators.

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

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