Luckin Coffee chairman removed from board by shareholders

Luckin Coffee shareholders have voted out its chairman Charles Zhengyao Lu, days after the company concluded its internal investigations into fraud claims.

Luckin Coffee Inc's chairman and co-founder Charles Zhengyao Lu has been evicted from the company, following a vote conducted during an extraordinary shareholders meeting in Beijing on Sunday 05 July 2020.

Three other board directors, including independent director Sean Shao were also voted out by the coffee chain’s shareholders, Bloomberg reported the information quoting Chinese news site 163.com.

At the same time, two other individuals by the names of Ying Zeng and Jie Yang, will reportedly be added as independent board directors, according to local media outlets 21st Century Business Herald and Sina.com.

Luckin Coffee shares are trading nearly 14% higher at US$2.87 in pre-market hours, as at 08:30 ET on Monday 06 July 2020.

Meanwhile, IG’s market analysis page show that the Luckin Coffee stock has an average ‘buy’ rating from three brokers, based on a Reuters poll.

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Investigation found that fabrication of transactions go back to April 2019

Lu’s ousting comes just three days after the company tried but failed in an earlier vote to remove Lu from its board. The board needed a prerequisite two-third of votes in order to pass the proposal.

The board had on 01 July asked for Lu to resign as a director and the chairman of the board, based on findings presented by and the recommendations of a Special Committee formed to investigate earlier fraud claims.

In the same statement, Luckin Coffee said that the internal investigation team also discovered that the alleged fabrication of transactions date back to April 2019.

As a result, the company said that its net revenue in 2019 was inflated by approximately 2.12 billion Chinese yuan – consisting of 0.25 billion yuan in the second quarter, 0.70 billion yuan in the third quarter, and 1.17 billion yuan in the fourth quarter).

The company’s costs and expenses were also inflated by 1.34 billion yuan in 2019 (consisting of 0.15 billion yuan in the second quarter, 0.52 billion yuan in the third quarter, and 0.67 billion yuan in the fourth quarter).

Evidence uncovered so far also demonstrate that Luckin Coffee’s former CEO Ms. Jenny Zhiya Qian, former Chief Operating Officer (COO) Mr. Jian Liu and certain employees reporting to them had participated in the fabrication of transactions.

For now, the coffee house said that it has enhanced its finance functions and engaged an internal controls and audit function to test and evaluate the existing controls environment and make suitable recommendations accordingly.

A timeline of Luckin Coffee’s share price collapse

As IG previously reported, Luckin Coffee’s share price fell 13% on 08 June 2020, after it was reported that Lu may also have been directly involved in fraud claims that have plagued the company since February this year.

In February, US investment firm Muddy Waters Research shorted the stock citing an anonymous report that had questioned the company’s financials.

Then on 02 April, the company announced that its Board of Directors had formed a special committee to ‘oversee an internal investigation into certain issues raised to the board’s attention during the audit of the consolidated financial statements for the fiscal year ended December 31, 2019’.

Next, US exchange Nasdaq halted trading of Luckin Coffee’s shares on 07 April after the company admitted in a US Securities and Exchange Commission filing that several senior employees – including Liu – had ‘engaged in the fabrication of certain transactions’ amounting to around 2.2 billion Chinese yuan in aggregate sales that date back to the second quarter of 2019.

After six weeks of trading freeze, the counter resumed trading on 21 May. This was met with a 43% decline right out of the gate to US$1.33 per share, as investors rushed to sell off their shares.

The stock has recovered over 89% since, but is still down by some 90% since investigations were launched.

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