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Chinese market watchdog issues $9m fine against Luckin and associated firms

Luckin Coffee Zhengyao control
Luckin founder and former Chairman Lu Zhengyao aka Charles Lu

MILAN – China’s market regulator has issued a fine of 61 million yuan (about 9 million U.S. dollars) to Luckin Coffee and 43 third-party firms over a scandal involving false sales figures.

An investigation found that, during the April-December period of 2019, Luckin Coffee had inflated key marketing indicators such as sales revenue, with the help of a number of third-party companies, in order to gain competitive advantages and trading opportunities, the State Administration for Market Regulation said on Tuesday in a statement on its website.

In addition, Luckin also misled customers by using fake data in its promotions, the watchdog reported.

Luckin, a startup listed on the Nasdaq, aimed to dethrone Starbucks in China via an aggressive growth strategy, enticing customers with an app-based purchasing model that prioritised takeaway and delivery options, as well as generous mobile coupons.

But its shares went into freefall after the company revealed in April that the records had been largely fabricated by some employees.

That prompted the regulator to start the investigation. The regulator said earlier that forged “merchandise vouchers” had been used by employees to book revenue by recording sales of the vouchers, which could be exchanged for cups of coffee or other products.

Then, the company made large payouts to little-known companies recorded as suppliers of raw materials. Many of them were linked to Charles Lu, the company’s co-founder and former chairman, according to WSJ.

More than 40 third-party companies, including Beijing Auto World Consulting Service and Beijing Shenzhou Youtong Technology Development, were found to have given “substantive assistance” for the false advertising, in violation of the anti-unfair competition law.

Luckin Coffee said that it respects and is resolutely implementing the punishment decision based on the investigation, and that it has comprehensively rectified relevant issues.

“We will further regulate our business activities according to the requirements of relevant laws and regulations, and ensure stable operations,” the company said in a statement on its official Weibo account, published after the market watchdog released its decision.

In May, CEO Jenny Zhiya Qian and COO Jian Liu were both fired and stripped of their roles on the board as a result of the inquiry.

Luckin completed its internal probe, conducted by Kirkland & Ellis International LLP and FTI Consulting, on July 1, and found that Liu, Qian and some employees reporting to them had been responsible for the fraud.