Please ensure Javascript is enabled for purposes of website accessibility

Luckin Coffee Reveals Findings of Its Internal Fraud Investigation

By Howard Smith – Updated Jul 1, 2020 at 2:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The former CEO and COO, as well as several employees of the rapidly growing Chinese coffee company, were implicated in its accounting scandal.

Scandal-plagued Luckin Coffee (LKNC.Y -6.87%) has released details of its internal investigation into the fabrication of approximately $300 million in revenue. Former CEO Jenny Zhiya Qian and former COO Jian Liu, who have both already been replaced, were confirmed to be linked to the fraud. The investigation also found other employees who reported to the two executives, along with third parties, were involved in the sales-fabrication scheme. 

The investigation included more than 60 witness interviews, and the review of over 550,000 documents, according to CNBC. It found that the fabrication of sales began in April 2019, and involved inflating costs and expenses by almost $200 million, as well as booking $300 million in false revenue. 

coffee barista pouring cream into cup of coffee

Image source: Getty Images.

The company said it has terminated 12 employees, some of whom had already been suspended, who were directly working at the direction of the former CEO and COO to carry out the fraud. Another 15 employees will be disciplined, the company said, and relationships are being terminated with third parties that were involved with supporting the falsified transactions. 

Earlier this week, Luckin was delisted from the Nasdaq stock exchange. And on Thursday, a special meeting of Luckin's board of directors will be held to consider the removal of co-founder Charles Lu as company chairman. The Wall Street Journal has previously reported that companies tied to Lu were involved in the scheme of purchasing vouchers in bulk, and receive payments as suppliers to aid in recording the false sales. 

In response to the investigators' findings, Luckin says it has implemented new controls to its finance functions and added internal controls to identify and prevent future misconduct.

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

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.