In a new filing, Luckin said an internal accounting investigation has revealed that COO Jian Liu allegedly fabricated fraudulent transactions to boost the company’s sales.
“The Special Committee today brought to the attention of the Board information indicating that, beginning in the second quarter of 2019, Mr. Jian Liu, the chief operating officer and a director of the company, and several employees reporting to him, had engaged in certain misconduct, including fabricating certain transactions,” the filing said.
Luckin said the employees involved have been suspended and Luckin has terminated contracts and dealings with the involved parties.
Investigators believe Liu and others involved in the scheme fabricated RMB2.2 billion ($310 million) in total sales and inflated certain costs and expenses, according to the coffee chain.
The company listed on the Nasdaq in May 2019.
Short Seller Sounds Alarm on Luckin
The news comes about three months after short seller Muddy Waters Research tweeted an anonymous report on Luckin that said the company was inflating its numbers. Muddy Waters said, at the time, the report seemed credible.
The author of the report claimed to have documented 11,260 hours of store traffic surveillance video that suggests Luckin inflated the number of items sold per store per day by 69% in the third quarter of 2019 and 88% in the fourth quarter of 2019.
“Luckin knows exactly what investors are looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence,” the report read.
Luckin initially denied the allegations following the release of the report.
“The methodology of the report is flawed, the evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events,” Luckin said in a statement on Feb. 3.
Citron Research also defended the company at the time, saying it was long Luckin stock and “app download and calls with competitors confirm [Luckin’s] financials.”
On Thursday, Luckin said the investigation is ongoing and investors can no longer rely on its financial statements and guidance issued since April 1, 2019.
Luckin shares were down 65.8% at $8.96 at the time of publication Thursday.
This news was obviously a huge home run for Muddy Waters and other Luckin short sellers — and a costly and embarrassing blow for Citron.
Luckin shares are now down 87.5% year-to-date, and investors must hope that the company can figure out a way to regain the trust of investors fast.
This story originally appeared on Benzinga.
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