The Wall Street Journal’s Jing Yang reports that Luckin Coffee, a Chinese competitor to Starbucks, has discovered it COO Jing Liu and members of his team fabricated large amounts of the company’s 2019 revenues, and possibly those in previous years as well. The WSJ reports:
Luckin said it has suspended chief operating officer Jing Liu and several employees who reported to him, after finding they had engaged in misconduct beginning in the second quarter of last year that included “fabricating certain transactions” and substantially inflating certain costs and expenses.
The company said it has formed a special committee to look into the matter. It said the investigation is at a preliminary stage, and that the company will “take all appropriate actions, including legal actions, against the individuals responsible for the misconduct.”
Luckin previously reported that net revenue for the nine months ended September 2019 totaled 2.93 billion yuan ($413 million), up sharply from 375 million yuan for the same period in 2018. It had also previously forecast fourth-quarter sales of between 2.1 billion yuan and 2.2 billion yuan.
The company said Thursday that the 2019 figures could no longer be relied upon, and it is also reviewing other prior financial disclosures.
Earlier this year, U.S. short seller Muddy Waters said it was betting against Luckin’s shares and circulated an anonymous report that alleged the company was inflating sales. Luckin said on Feb. 3 that the report was malicious and rejected its claims, calling them false, misleading and irrelevant
Shortly after, CICC came out in defense of Luckin in a research report, saying it believed the anonymous allegations were mainly based on grass-root surveys as well as subjective speculation. CICC also said it expected Luckin to turn profitable in 2021.
“A company wouldn’t admit to something this bad unless it has to,” said Drew Bernstein, co-chairman of accounting firm Marcum Bernstein & Pinchuk who co-leads its China practice. He said the anonymous report circulated earlier this year could have prompted Luckin’s auditors to scrutinize the company’s accounting more closely.
“It was an extremely detailed report,” Mr. Bernstein said, adding that a lot of the information looked like it could have only come from inside the company.
“We believed this report was credible when we read it, and that’s why we took a position,” said Carson Block, founder and chief investment officer of Muddy Waters.
A spokeswoman for Credit Suisse declined to comment. Representatives for Morgan Stanley and CICC didn’t respond to requests for comment. Luckin’s auditors, Ernst & Young, also didn’t reply to a request for comment.