China’s Luckin Coffee has agreed to pay $180 million to settle U.S. charges that it fabricated more than $300 million in coupon sales to present a false picture of rapid growth to investors.
The coffee retailer, which went public in the U.S. in a blockbuster initial public offering last year, reached the settlement with the Securities and Exchange Commission six months after it disclosed the accounting fraud, causing its stock price to plummet 75%.
According to the SEC, the fraud resulted in Luckin overstating its reported revenue by approximately 28% for the second quarter of 2019 and by 45% for the third quarter. During the same time periods, it understated its net loss by about 15% and 34%, respectively, the commission said in a civil complaint.
“Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors,” Stephanie Avakian, director of the SEC’s Division of Enforcement, said in a news release.
As Reuters reports, Luckin “had one of the most successful U.S. IPOs by a Chinese company last year,” raising $561 million amid interest from prominent U.S. investors, including long-only funds and hedge funds.
But the company allegedly began fabricating coupon sales in April 2019 because, the SEC said, it was “not able to meet its own guidance, extraordinary predictions, or the market’s high expectations for revenue and growth.”
In a scheme that accounted for most of the $311 million in fake sales, employees arranged coupon sales to shell companies, the SEC alleged.
Luckin also allegedly inflated its expenses by more than $190 million to create the appearance that expenses were consistent with reported revenue. One employee expressed concern that the fraud would be exposed if suppliers noticed “the abnormality [in Luckin’s growth] because we don’t purchase that much.”
Luckin CEO Jinyi Guo said in a statement that the settlement “reflects our cooperation and remediation efforts and enables the company to continue with the execution of its business strategy. The company’s board and management are committed to a system of strong internal financial controls and adhering to best practices for compliance and corporate governance.”