Luckin Coffee has sacked its chief executive and chief operating officers after internal investigations by the company brought to light further evidence of wrongdoing related to an accounting fraud scandal exposed by short seller Muddy Waters Research in January.
The takeaway coffee chain led by billionaire Charles Zhengyao Lu had raised $561 million in a NASDAQ IPO last May only to announce yesterday that it had fired CEO Jenny Zhiya Qian, who co-founded the company with Lu in 2017, as well as COO Jian Liu, following its ongoing probe into fabricated sales transactions.
“The company has been cooperating with and responding to inquiries from regulatory agencies in both the United States and China,” Luckin noted in a statement.
The Xiamen-based company said that it had suspended six other employees who were involved in or had knowledge of the manipulated figures, which cover much of 2019, with preliminary findings indicating RMB 2.2 billion ($310 million) in sham sales.
The controversy has so far had no bearing on Lu’s status as chairman of the board, a role he has held since June 2018. However, some analysts indicated that there may be more disruption on the way at the delivery coffee company, including the potential for further firings and penalties against the listed firm and its directors.
“From motivation, capability to liability, this systematic fraud after the IPO seems to involve more power-holders than just its chief operating officer and some underlings,” said Shen Meng, a director at boutique Beijing investment bank Chanson & Co.
Shen went on to predict that Luckin would not last long on the NASDAQ exchange. ““Certainly, the company will be delisted after reports of inflating its revenue,” he said. “The only uncertainty indeed lies in the length of the investigation, which depends on two factors: the scale and complexity of the fabrication, and whether the regulators want to take advantage of this scandal.”
Trading Halted after Rout
Differentiating itself from Starbucks by having 90 percent of its stores as pick-up only locations, Luckin has burned through cash from major backers including BlackRock and GIC in its effort to overtake the American chain as the biggest coffee chain in China.
It listed on the NASDAQ 12 months ago despite never having turned a profit, and has since added around 2,000 stores to bring its total to 4,500 in its quest for coffee domination in China.
Trading in Luckin shares has been halted since 7 April, after 80 percent of the stock’s value was demolished in a mass sell-off by investors rattled by the fraud revelations.
Sacking Lu’s Lieutenants
The sacking of the top-ranking senior executives, who are both longstanding lieutenants of Lu, comes just over a month after Goldman Sachs seized shares from the Luckin chairman after he defaulted on a $518 million margin loan.
Despite fingering now former COO Jian Liu as the mastermind of the manipulated sales figures in a previous statement on 2 April, Luckin’s announcement yesterday implicated co-founder and former CEO Jenny Zhiya Qian in the scandal for the first time.
Both Qian and Liu have been associated with the Luckin chairman for more than ten years through their involvement with Hong Kong-listed car rental company CAR Inc and ride-hailing affiliate UCAR, both of which Lu founded.
Switching From Car Rental to Coffee
Prior to her appointment as CEO of Luckin in November 2017, Qian had served as the chief operating officer at UCAR from 2016 to 2017 and the chief operating officer of CAR Inc from 2014 to 2016, according to Luckin’s IPO prospectus dated 22 April 2019.
Liu, who was appointed as Luckin’s COO in May 2018, had served as the head of yield management for UCAR from 2015 to 2018, after joining the company in 2008.
Car Inc raised over $400 million in its Hong Kong listing in 2014 after Lu founded the firm in 2007. He launched UCAR in 2015, and is currently chairman of both companies.
Fresh Blood From the Same Source
Following its dismissal of Qian and Liu, the Luckin board has appointed Jinyi Guo, another former Car Inc executive, as the company’s new acting chief executive officer.
Guo, who had served as a Luckin director since June 2018, was previously the assistant to the chairman at UCAR Inc from 2016 to 2017.Despite these links between the companies, CAR Inc moved to reassure investors that it does not hold Luckin American depositary shares or securities and is not engaged in any business transactions with the coffee chain following a 54 percent plunge in its share price last month.