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Why Luckin Coffee Stock Plunged Today

By Joe Tenebruso – May 28, 2020 at 4:52PM

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A new report by The Wall Street Journal attempts to shed light on just how pervasive the company's accounting scandal could be.

What happened

Shares of Luckin Coffee (LKNC.Y 0.06%) plummeted more than 20% on Thursday after The Wall Street Journal released a scathing report claiming that firms linked to the company's chairman and controlling shareholder played a central role in its accounting scandal.

So what

Luckin Coffee reportedly sold vouchers redeemable for "tens of millions of cups of coffee" to businesses linked to its chairman and largest shareholder, Lu Zhengyao (who also goes by the name Charles Lu), according to the Journal. By doing so, Luckin was able to record higher sales than its stores were actually generating. 

Additionally, the Journal reported that Luckin used a fictitious employee to process more than $140 million of raw material payments as part of the ruse.

Worse still, other Luckin employees reportedly helped to fabricate as much as $42 million in sales by using individual accounts registered with cellphone numbers to buy vouchers. This scheme allegedly began before the company's initial public offering (IPO) in May 2019.

A downwardly sloping stock chart.

Luckin Coffee stock sank following the release of new information related to its accounting scandal. Image source: Getty Images.

Now what

Luckin Coffee's internal investigation is still under way, but the company has already said that as much as $310 million of its sales had been fabricated. Luckin has already fired its CEO and COO for their alleged involvement in the scandal.

It now appears that Luckin Coffee's most senior leadership -- including its chairman, chief executive officer, and chief operating officer -- all played key roles in the company's deception. That's likely to have terrible ramifications for investors -- many of whom have already suffered brutal losses -- up to and including a complete loss of capital if Luckin's shares descend further toward $0.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool has a disclosure policy.

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