Chinese authorities ordered troubled coffee chain Luckin Coffee and a group of affiliated companies to pay a fine of RMB 61 million ($9 million) for creating unfair competition by engaging in sales fraud.
Why it matters: Luckin Coffee is receiving its first fine six months after admitting to financial fraud in early April. Regulators and investors at home and abroad are still investigating the company, which may see more penalties as inquiries conclude.
Details: Issued Tuesday by China’s top commerce watchdog, the State Administration for Market Regulation, the fine was applied to 45 companies, including two Luckin entities and 43 other companies that helped the coffee chain inflate its sales.
- The regulator is the executive authority of China’s Unfair Competition Law. It found that Luckin, assisted by multiple third-party partners, inflated its sales, costs, and profits from August 2019 to April 2020. The practices violated competition laws and misled the public, it said.
- China’s Ministry of Finance, which overseas violations of China’s Accounting Law, is also investigating Luckin, as is the US Securities and Exchange Commission, stock investors, and owners of its convertible bonds. Moreover, management led by Charles Lu are said to be facing criminal charges over the scam.
- Luckin said it has “carried out an overall rectification on the related issues” (our translation) in a statement on Chinese microblogging site Weibo on Tuesday. “We will further improve our operations according to related laws and regulations.”
Context: Two months after short seller Muddy Water tweeted a short report from an anonymous author, Luckin admitted on April 2 that it fabricated RMB 2.2 billion in sales in 2019, causing its shares to plunge more than 80% within a week.
- Luckin management has been fighting for control over the company since April. In a September board meeting, founder Charles Lu lost when his opponent Sean Shao made a comeback after briefly being ousted from the board two months earlier.
- The scandal from the once high-flying coffee chain put Chinese tech companies in the crosshairs of regulators and short sellers.