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Luckin Coffee shares plunge over 75% after investigation finds COO fabricated sales

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MILAN – Luckin Coffee Inc. shares sank over 75% in Thursday trading after an internal investigation found that its chief operating officer fabricated 2019 sales by about 2.2 billion yuan ($310 million). In a filing with the SEC yesterday morning, the company’s board announced that it has initiated an internal investigation into the activities of its former COO, Jian Liu, who may have inflated revenues by the company by an early estimate of more than $300 million (RMB2.2 billion).

Expenses are believed by the board to be similarly inflated. Legal firm Kirkland & Ellis is the board’s counsel in its internal investigation.

The stock began trading publicly on the Nasdaq in May. Shares peaked in January at $51.38 but tumbled as the coronavirus outbreak spread in China. The stock hit an all-time low of $4.90 per share Thursday morning. Excluding Thursday’s plunge, the stock was up 54% since its IPO.

Liu and the employees implicated in the misconduct have been suspended, and Luckin said it will take legal action against those responsible.

The alleged fraud is believed to have begun in the second quarter of 2019, although further details will have to come as the company conducts its investigation.

The company told investors in its filing that they shouldn’t rely on the company’s recent financial statements, which are now believed to be inaccurate given the surfacing of this information.

Luckin said the investigation is in preliminary stages and it is still examining the financial impact.

Founded in 2017 by its current CEO, Qian Zhiya, Luckin has around 4,500 coffee outlets in China as it goes head-to-head with Starbucks in the world’s biggest coffee market.

Luckin, which is backed by BlackRock (BLKB) – Get Report and Singapore’s powerful sovereign wealth fund, estimates consumption will rise to 15.5 billion cups by 2023, nearly 80% higher than last year’s record levels.

The announcement of the investigation comes just days after the company appointed two new independent directors to its board.

Last week, the company announced that Tianruo Pu, a seasoned accounting executive who was CFO of Zhaopin and UTStarcom, and Wai Yuen Chong, a supply chain executive who had stints at Charoen Pokphand Group and Luckin competitor Starbucks, had joined as independent directors and joined the company’s audit committee.