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Luckin Coffee charged with fraud, to pay $180 million in settlement, SEC says

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U.S. securities regulators on Wednesday charged Luckin Coffee Inc. with accounting fraud, alleging that the company, a major Starbucks Corp. competitor in China, fabricated sales and misstated other financial metrics in order to make itself look better to investors.

Luckin Coffee “materially” misstated revenue, expenses and net operating losses “in an effort to falsely appear to achieve rapid growth and increased profitability and to meet company’s earnings estimates,” the U.S. Securities and Exchange Commission said Wednesday.

Luckin Coffee, which had been under investigation for months, has agreed to pay a $180 million fine to settle the charges without admitting or denying the allegations, the SEC said. The settlement is subject to court approval.

American depositary shares of Luckin Coffee traded on the Nasdaq until mid-July, and the company raised nearly $900 million from debt and equity investors.

“The settlement with Luckin is designed to help ensure that harmed investors have the best available opportunity to receive relief,” said Carolyn Welshhans, an associate director with the SEC’s Division of Enforcement.

Related: Opinion: Luckin Coffee shows how risky Chinese IPOs can be, but investors are just not listening

According to the SEC complaint, Luckin intentionally fabricated more than $300 million in retail sales starting in at least April 2019 through January 2020. The company allegedly used related parties to create false sales transactions in three separate sales schemes.

The company began operations in October 2017 and quickly grew to thousands of stores across China. Its stock went public in May 2019, with a first trade of $25, 47% above the $17 IPO price. Share prices had dwindled to less than $4 in the over-the-counter markets on Wednesday.

According to the complaint, certain Luckin employees, which the SEC didn’t name, attempted to conceal the fraud by inflating the company’s expenses by more than $190 million, creating a fake operations database and altering accounting and bank records to reflect the false sales.

Luckin allegedly overstated its reported revenue by approximately 28% for the period ending June 30, 2019, and by 45% for the period ending Sept. 30, 2019, the SEC said.

During the period of the fraud, Luckin raised more than $864 million from debt and equity investors, the SEC said.

After its misconduct was uncovered as part of annual external audit, Luckin “reported the matter to and cooperated with SEC staff, initiated an internal investigation, terminated certain personnel, and added internal accounting controls,” the SEC said.

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