In 2020, the Securities and Exchange Commission (SEC) charged Luckin Coffee Inc., considered by many to be the Chinese rival to Starbucks, with defrauding investors by falsifying the company’s revenue, expenses, and net operating loss in order to make it look like the business experienced quick growth and profitability.  Its stock price skyrocketed, allowing Luckin, which traded on Nasdaq until July 13, 2020, to substantially increase its equity.“Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors,” said Stephanie Avakian, Director of the SEC’s Division of Enforcement, at the time. “While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as U.S. issuers and persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws.”Luckin has now come to a $175 million settlement of the class action claims against it that it “fraudulently inflated its share price by falsifying revenue,” according to court papers.  The settlement is an all-cash one, and Luckin is busily liquidating its business in the Cayman Islands and filing for protection protection under the U.S. Bankruptcy Code.“The SEC’s complaint alleges that Luckin’s disclosures to investors about its revenues were false,” said Carolyn M. Welshhans, Associate Director of the SEC’s Division of Enforcement. “The settlement with Luckin is designed to help ensure that harmed investors have the best available opportunity to receive relief.”

Photo by Foodie Factor on Pexels

U.S. District Judge John Cronan in Manhattan, New York, nominated to his post by former U.S. President Donald Trump, approved the preliminary settlement, and scheduled a Jan. 31, 2022, hearing to review the details and consider a final approval of the deal.  It must also be approved by a Cayman Islands court, which may delay mataters.Founded in 2017, Luckin ended its business last spring with about 5,000 stores.  Short-seller Muddy Waters Research accused it of inflating it revenue, which ultimately led to the lawsuit.  Two months later, Luckin’s share price dropped 81% after it was discovered the the chief operating officer made up around $310 million of the company’s sales in 2019.  The SEC accused Luckin of generating more than $864 million from equity and debt investors while the fraud was occurring.According to the SEC, “from at least April 2019 through January 2020, Luckin intentionally fabricated more than $300 million in retail sales by using related parties to create false sales transactions through three separate purchasing schemes.” The government’s complaint continues, “Luckin employees attempted to conceal the fraud by inflating the company’s expenses by more than $190 million, creating a fake operations database, and altering accounting and bank records to reflect the false sales.”It has been said by stock market experts that the Luckin case is an example of the potential risk associated with investing in a foreign company on the U.S. stock exchange.  Luckin has denied any wrongdoing.

Sources:

Luckin Coffee in $175 mln class action settlement over accounting fraudLuckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges