Luckin boss to face fraud charges in China
Lu Zhengyao, chairman of scandal-ridden Luckin Coffee Inc.,
is likely to face criminal charges in China after authorities discovered emails
in which he instructed colleagues to commit fraud, a source close to domestic
regulators told Caixin.
China's top market watchdog and the Ministry of Finance have
found evidence that Luckin, which is listed on the Nasdaq and seen as a
domestic challenger to Starbucks Corp., paid taxes on bogus transactions,
multiple people close to the company's internal investigation team told Caixin.
In early April, Luckin admitted to inflating sales by around
2.2 billion yuan ($310.7 million) through fabricated transactions for the final
three quarters of last year. The case triggered a wave of backlash from
American regulators and politicians against U.S.-listed Chinese companies, many
of which do not grant U.S. audit regulators access to their audit working
papers.
Luckin has initially blamed Chief Operating Officer Liu Jian
and several of his subordinates for the fraud. Last month, the coffee maker
fired Liu and CEO Qian Zhiya. Lu, however, has retained his role as chairman.
Although Luckin, which is registered in the Cayman Islands,
is not directly subject to the China Securities Regulatory Commission's
oversight, China's new Securities Law has empowered the securities watchdog to
regulate such a company as its operating assets are all in the country, the
source close to regulators said.
The new Securities Law, which came into effect in March,
stipulates that China can hold entities legally accountable for overseas
securities trading that disrupts domestic market order or harms domestic
investors' interests.
Luckin's actions also violate China's accounting law, the
source said. The law states that companies that produce false accounting
reports and those who instruct them to do so will face charges if their
misconduct constitutes a crime.
While the Nasdaq told Luckin last month that it would be
delisted due to "public interest concerns" raised by the fraud, the
company said it planned to request a hearing on the issue.
Luckin debuted in the U.S. last May with a $561 million IPO
only one and a half years after its founding. Like many other Chinese startups,
Luckin has relied heavily on a cash-burning subsidy strategy to fund a
lightning-fast expansion.
Its misconduct bears similarities to an incident nearly 10
years ago when a series of scandals prompted investors to short an array of
U.S.-listed Chinese companies, a source at a foreign investment bank said. The
case reflects long-standing cracks in China-U. S. coordination of financial
supervision that offer room for dodgy business practices, the person said,
adding that without a resolution for this problem, overseas-listed Chinese
companies will always be under a shadow.
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