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May 26, 2020

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Luckin Coffee looks like it may be finally running out of luck

Investors punished Luckin Coffee Inc for financial fraud, sending its shares down by as much as 45 percent last Wednesday on the first day of trading after a six-week suspension on New York’s Nasdaq market.

Worse for the once high-flying coffeehouse chain, its stock is now under the threat of delisting.

Shares at the closing bell on Friday were trading at US$1.39, compared with their historical high of over US$50 on January 17. The market value of Luckin has been slashed to US$350 million.

Last Tuesday, a day before the resumption of trading, the company received a delisting recommendation notice from the Nasdaq exchange, which cited “public interest concerns” related to accounting discrepancies.

At the same time, Nasdaq is proposing tighter standards that would limit new listings or the ability to remain listed for companies from China and other foreign markets.

The Chinese coffeehouse chain, founded in Beijing but headquartered in the southern city of Xiamen, said it would request a hearing to appeal the delisting recommendation.

Shanghai Daily talked to several attorneys who cast doubt on the company’s chances of success in overturning the decision.

Luckin, as of January, had 4,507 outlets across the country, more than its rival Starbucks. Its success story started to unravel in April, when the company revealed that Chief Operating Officer Liu Jian and other employees fabricated up to 2.2 billion yuan (US$301 million) in sales last year. The matter is being investigated by both Chinese and US authorities.

Lu Zhengyao, founder and chairman of Luckin Coffee, has publicly apologized to investors and coffeehouse staff for “the terrible impact of the incident.”

But in a personal statement released on Wednesday he said he was surprised that the Nasdaq market would consider delisting company before an investigation was completed and results disclosed.

“I feel deeply disappointed and regretful about this,” Lu wrote.

Hearing on delisting

Lu also rebutted speculation that funds obtained by pledging Luckin’s shares have been used to support his personal life instead of company operations. He said he welcomed an investigation into those allegations.

A hearing on the delisting recommendation is expected to be heard in 30 to 45 days.

“Given the seriousness of the fraud, it is unlikely that the company can turn around the situation at the hearing,” said Yang Zhaoquan, a lawyer at Beijing Vlaw Law Firm. “In all probability, the company will eventually be delisted from the Nasdaq in the near future."

Dong Zhengyi, a lawyer at Shanghai Joint-Win Partners, said in a note that under US laws, offences of false financial reporting and willful securities fraud are punishable by 10 to 25 years’ imprisonment and fines of up to US$5 million for individuals involved and US$25 million in corporate fines.

Luckin Coffee, the company’s directors, supervisors, senior management personnel and audit agencies may be liable for a big class action suit.

Under China’s new Securities Law, which took effect on March 1, the company will possibly be held accountable by both China and the US at the same time, Dong added.

The China Securities Regulatory Commission strongly condemned Luckin’s accounting fraud in a statement on April 3.

The regulator said companies must strictly abide by market laws and rules, fulfilling their obligation to disclose information truthfully, accurately and completely, no matter where they are listed.

The commission said it will adhere to international arrangements covering securities regulation, pursue its investigation of the matter and continue to crack down on securities fraud.

Cao Yu, co-vice chairman of the China Banking and Insurance Regulatory Commission, also weighed in on the issue at a media conference on April 22, stating that the body would support efforts by authorities to severely punish law violators.

“We will maintain a zero-tolerance attitude toward financial fraud and will work together to maintain a good market environment,” Cao said.

Luckin went public on the Nasdaq in May 2019, pricing its shares in the initial public offering at US$17 each. It enjoyed an initial rush of investment.

When Luckin announced it had suspended its chief operating officer and several other employees for financial misconduct on April 2, its shares nosedived by over 80 percent at the opening bell in New York.

Luckin has asked investors not to rely on its financial statements and earning releases for the nine months ended last September 30, nor on quarterly reports in April and July 2019.

Its shares were suspended before the close of trading on April 7 “pending further disclosure,” according to Nasdaq. At that time, they were trading at US$4.39.


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