The Securities and Exchange Commission today charged China-based company Luckin Coffee Inc. with defrauding investors by materially misstating the company’s revenue, expenses, and net operating loss in an effort to falsely appear to achieve rapid growth and increased profitability and to meet the company’s earnings estimates.
Luckin, whose American Depositary Shares traded on Nasdaq until July 13, 2020, has agreed to pay a $180 million penalty to resolve the charges.
The SEC’s complaint alleges that, 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.
According to the complaint, certain 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.
The complaint further alleges that the company intentionally and materially overstated its reported revenue and expenses and materially understated its net loss in its publicly disclosed financial statements in 2019.
For example, Luckin allegedly materially overstated its reported revenue by approximately 28% for the period ending June 30, 2019, and by 45% for the period ending Sept. 30, 2019, in its publicly disclosed financial statements. The complaint alleges that during the period of the fraud, Luckin raised more than $864 million from debt and equity investors.
After Luckin’s misconduct was discovered in the course of the annual external audit of the company’s financial statements, Luckin reported the matter to and cooperated with SEC staff, initiated an internal investigation, terminated certain personnel, and added internal accounting controls.
“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. “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.”
“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.”
The SEC’s complaint, filed today in the Southern District of New York, charges Luckin with violating the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.
Without admitting or denying the allegations, Luckin has agreed to a settlement, subject to court approval, that includes permanent injunctions and the payment of a $180 million penalty. This payment may be offset by certain payments Luckin makes to its security holders in connection with its provisional liquidation proceeding in the Cayman Islands. The transfer of funds to the security holders will be subject to approval by Chinese authorities.
The SEC’s investigation is continuing and being conducted by Kathleen McDermott, Michael Brennan, Lory Stone, and Janet Yang, with assistance from Melissa Armstrong and Jan Folena. The case is being supervised by Laura Josephs and Ms. Welshhans. The SEC appreciates the assistance of the China Securities Regulatory Commission and the Swiss Financial Market Supervisory Authority.