Luckin Coffee fires CEO, COO after internal investigation into fabricated transactions

Louise Moon

Luckin Coffee, often viewed as China’s answer to Starbucks, has fired its chief executive and chief operating officer after an internal investigation into fabricated transactions that roiled investors and undermined the trust in Chinese financial reporting.

According to a filing on Tuesday, The New York-listed coffee chain’s board has terminated CEO Jenny Qian Zhiya and COO Liu Jian and “demanded and received” their resignations from the board, according to a filing and company statement on Tuesday. The shake-up took effect on Monday.

The move follows last month’s suspension of Liu for alleged misconduct that erased US$2.1 billion of its market value since then, stoked a sell-offs in companies linked to its chairman and backer Charles Lu Zhengyao, and triggered potentially costly lawsuits from shareholders and bond investors.

The episode added to a long list of accounting shenanigans among some foreign-listed Chinese companies over the years, while inflaming US-China ties against the recent backdrop of trade war. China’s market regulators are probing the case, underscoring efforts to repair the image and trust in its US$7.9 trillion onshore stock market.

Luckin coffee team in New York during its listing ceremony in May 2019. Photo:

In the April 2 announcement, for alleged misconduct, the Xiamen-based start-up said its turnover was inflated by about 2.2 billion yuan (US$309 million) between the second quarter and the fourth quarter of 2019, and certain costs and expenses were “substantially inflated” through fabricated transactions.

Previously released earnings for the nine months through September were no longer reliable, it said at the time.

Six other employees who were involved in or had knowledge of the fraud have also been placed on suspension or leave, on the recommendation of a committee leading the internal investigation, according to Tuesday’s filing.

Trading of Luckin’s stock has been halted on the Nasdaq exchange since April 7. Photo: Reuters

Meanwhile, senior vice-president and director of the board, Guo Jinyi, has been appointed acting CEO. Cao Wenbao, senior vice-president in charge of store operations and customer service, and Wu Gang, vice-president in charge of strategic partnerships and supply chain management, have been named to the board of directors.

“The company will continue to cooperate with the internal investigation and focus on growing its business under the leadership of the board and current senior management,” it said.

How Luckin, the ‘dream client’, became Credit Suisse’s nightmare

Luckin’s stock has been halted on the US’s Nasdaq exchange since April 7, but not before its shares plummeted by more than 83 per cent to US$4.39 since the disclosure of the fraud.

The day before the stock was halted, a group of lenders was preparing to sell some 76.4 million shares, pledged as loan collateral, after an entity controlled by chairman Charles Lu Zhengyao defaulted on a US$518 million margin loan, according to an announcement by “disposal agent” Goldman Sachs.

Since its founding in 2017, Luckin has expanded rapidly, and was operating more than 3,500 locations globally as of late 2019. Qian, the dismissed founder, was last reported to have owned about 20 per cent of the company.

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