Luckin founder Lu Zhengyao to face criminal charges for financial fraud

FILE PHOTO: A cup of 'Luckin Coffee' coffee is poured during the company's IPO at the Nasdaq Market site in New York, U.S., May 17, 2019. REUTERS/Brendan McDermid/File Photo

Lu Zhengyao, chairman of scandal-ridden Luckin Coffee Inc., is likely to face criminal charges in China after authorities discovered emails in which he instructed colleagues to commit fraud, a source close to domestic regulators told Caixin.

China’s top market watchdog and Ministry of Finance have found evidence that Luckin, which is listed on the Nasdaq and seen as a domestic challenger to Starbucks Corp., paid taxes on bogus transactions, multiple people close to the company’s internal investigation team told Caixin.

In early April, Luckin admitted to inflating sales by around 2.2 billion yuan ($310.7 million) through fabricated transactions for the final three quarters of last year. The case triggered a wave of backlash from American regulators and politicians against U.S.-listed Chinese companies, many of which do not grant U.S. audit regulators access to their audit working papers.

Although Luckin, which is registered in the Cayman Islands, is not directly subject to the China Securities Regulatory Commission’s oversight, China’s new Securities Law has empowered the securities watchdog to regulate such a company as its operating assets are all in the country, the source close to regulators said.

The new Securities Law (link in Chinese), which came into effect in March, stipulates that China can hold entities legally accountable for overseas securities trading that disrupts domestic market order or harms domestic investors’ interests.

Luckin’s actions also violate China’s accounting law, the source said. The law states that companies that produce false accounting reports and those who instruct them to do so will face charges if their misconduct constitutes a crime.

While the Nasdaq told Luckinlast month that it would be delisted due to “public interest concerns” raised by the fraud, the company said it planned to request a hearing on the issue.

Luckin debuted in the U.S. last May with a $561 million IPO only one and a half years after its founding. Like many other Chinese startups, Luckin has relied heavily on a cash-burning subsidy strategy to fund a lightning-fast expansion.

Luckin’s misconduct bears similarities to an incident nearly 10 years ago when a series of scandals prompted investors to short an array of U.S.-listed Chinese companies, a source at a foreign investment bank said. The case reflects long-standing cracks in China-U.S. coordination of financial supervision that offer room for dodgy business practices, the person said, adding that without a resolution for this problem, overseas-listed Chinese companies will always be under a shadow.

Han Wei contributed to this report.

This article was first published on Caixin Global. 

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.