An investigation into accounting misdeeds at Luckin Coffee Inc. has concluded that the company’s president knew, or should have known, about the fabricated transactions that inflated sales of the Chinese coffee chain last year, according to a person familiar with the affair.
A report detailing the internal investigation also said that Charles Lu, co-founder and president of Luckin, did not fully cooperate with the investigation, the person said.
The month-long investigation was conducted by a special committee of the Luckin board with the assistance of the law firm Kirkland & Ellis LLP. It found evidence that Mr. Lu was aware of certain related party transactions that were not properly disclosed, the person added.
Mr. Lu did not respond to requests for comment. A Luckin Coffee spokesperson declined to comment.
Three-year-old Luckin, a rival upstart to Starbucks Corp. in China, was listed on the Nasdaq stock market in May 2019. Just 11 months later, he revealed that more than $ 300 million of his sales were made in 2019. Shares of the company’s US custodian are in the process of foreclosure, and Luckin’s market capitalization has fallen below $ 1 billion, from more than $ 12 billion in January this year.
The Wall Street Journal reported in May that a group of Luckin employees began creating bogus sales transactions prior to the company’s IPO, by reserving coupon sales that could be exchanged for cups of coffee. Some of the coupons were purchased by individual accounts, but the vast majority were purchased during the second half of 2019 by a number of little-known companies, many of which had ties to Mr. Lu, according to documents reviewed by the Journal. and other people. familiar with the matter.
Additionally, a company linked to Mr. Lu was registered with Luckin’s systems as a raw material supplier and received payments from Luckin that were approved by his former CEO, Jenny Qian, according to Journal reports.
On Sunday afternoon, a crucial vote by Luckin’s shareholders took place in Beijing that crystallized a fight for control of the company’s board. Mr. Lu, whose status as Luckin’s controlling shareholder has been under threat, had filed resolutions to remove four directors, including himself and representatives of two other Luckin shareholders, and replace them with their nominees. The result of the vote was not immediately known.
Last week, Luckin said an internal investigation into accounting misconduct was substantially complete, and that sales were inflated from April 2019 through the fourth quarter, confirming previous Journal reports.
The company said it decided to fire a dozen employees who informed Ms. Qian, former CEO or former chief operating officer Jian Liu and that they knew or participated in the scheme, and subjected 15 other employees to “disciplinary action. ” “
Luckin said the funds supporting the scheme were channeled to the company through a series of third parties associated with its employees or related parties. He said that 1.34 billion yuan ($ 190 million) in costs and expenses were inflated last year, and is in the process of “ending relations with all third parties involved in manufactured transactions.”
The company did not detail Mr. Lu’s role in the scheme, but said directors proposed removing it at a board meeting last week based on “documentary and other evidence identified in the Internal Investigation and its evaluation of [his] degree of cooperation in Internal Investigation “.
Mr. Lu managed to retain his seat last week, as the board needed a two-thirds majority to expel Mr. Lu. Three of its eight board members who are also Luckin executives voted against Mr. Lu’s removal, according to the person familiar with the matter.
On Sunday, the extraordinary general meeting that Mr. Lu called to reconstitute Luckin’s board of directors was held in an expanding shopping complex protected by strict security measures. Journalists were barred from entering and security guards told them not to congregate.
Mr. Lu’s control over the company is in question, as creditors, including Credit Suisse Group AG, have moved to confiscate and sell a portion of his shares to recover a $ 533 million margin loan that he defaulted on.
A court in the Cayman Islands last month granted a request from the banks to liquidate entities holding Luckin shares owned by Mr. Lu and his sister, and another related court hearing is scheduled for July 6.
A representative of KPMG, the court-appointed liquidator, attended the shareholders’ meeting in Beijing, according to people familiar with the matter.
Jonathan Cheng and Liyan Qi contributed to this article.
Write to Jing Yang at [email protected]
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