Coffee chain misdoings alerted regulators to potential irregularities with overseas companies listed in the US

Luckin Coffee will pay a $180m fine to settle accounting fraud charges as the US Securities and Exchange Commission (SEC) ramps up scrutiny of Chinese companies.

The watchdog’s investigation discovered that the coffeehouse chain fabricated sales transactions and defrauded investors by materially misstating revenue, expenses and net operating loss. The moves were aimed to make the company falsely appear to have achieved rapid growth and increased profitability.

The SEC claims from April 2019 to January 2020, Luckin intentionally fabricated around $311m in retail sales by using related parties to create false transactions through three separate purchasing schemes.

Certain executive officers and senior managers then tried to hide the fraud by inflating the company’s expenses by more than $190m, creating a fake operations database, and altering accounting and bank records, according to the complaint.

The regulator alleges the coffee chain overstated its reported revenue by approximately 28% for the period ending June 30, 2019, and by 45% for the period ending September 30, 2019 in its publicly disclosed financial statements. These material misstatements made in reports, earnings calls, and guidance provided in January 2020 coincided with Luckin raising more than $864m from the debt and equity markets.

After the misconduct was discovered during the annual external audit of the financial statements, Luckin reported the matter to and cooperated with SEC staff. The company started an internal investigation, terminated certain personnel and added internal accounting controls.

On July 13, Luckin’s American Depositary Shares were delisted from the Nasdaq.

The SEC’s director for the division of enforcement Stephanie Avakian said in a statement: “While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as US issuers and persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws.”

US authorities are placing greater scrutiny on Chinese companies and other emerging markets listed in America. In December, Congress passed legislation that could result in Chinese companies being delisted from US stock exchanges if they do not comply with accounting rules. Almost 200 Chinese companies are listed on American stock exchanges with a total market capitalisation of around $2.2trn.