China’s top securities regulator denounced Luckin Coffee on Friday after the beverage chain disclosed that one of its top executives and other employees had faked billions of yuan in sales over most of 2019.

Details: The China Securities Regulatory Commission (CSRC) said in a statement published Friday that it would launch an investigation into Luckin Coffee’s alleged financial misconduct based on arrangements around international securities regulations.

“The CSRC pays high attention to Luckin Coffee’s financial misconduct and condemn the company for those financial misconduct behaviors. Publicly traded companies, wherever they are listed, should strictly comply with relevant markets’ law and regulations and fulfill their duties of accurately revealing financial information.”

— CSRC in a statement (our translation)

What the lawyer says: Nasdaq-listed Luckin does not fall under the CSRC’s jurisdiction, so it could only release a statement condemning it, Liu An, a securities lawyer at Beijing-based law firm Dentons China, said in an interview with reporters on Friday.

  • Liu mentioned that the revised Securities Law of China, which went into effect on March 1, would give the CSRC more legal basis to probe Luckin’s misconduct allegations. But in order to do so, misconduct must have taken place after March 1, he added.
  • The new Securities Law had added an article that bans overseas-listed Chinese companies from “harming interests of domestic investors,” according to Liu.
  • “Chinese investors of Luckin can also file lawsuits against the company if the misconduct lasted after the new Securities Law became effective.”

Context: Luckin announced Thursday that a preliminary internal investigation showed that it reported an estimated RMB 2.2 billion ($310 million) worth of phony sales to investors, from the second to the fourth quarter of 2019. 

  • The Xiamen-based company’s shares plummeted 75.6% Thursday on the disclosure.
  • In February, short seller Muddy Waters posted an anonymous report which accused Luckin of disclosing fraudulent operational figures and that it is a “fundamentally broken business.”

Wei Sheng is a Beijing-based reporter covering hardware, smartphone, and telecommunications, along with regulations and policies related to the China tech scene. Before joining TechNode, he wrote about...