Luckin Coffee disclosed that an internal investigation has found that its chief operating officer fabricated 2019 sales by about 2.2 billion yuan ($310 million).
Shares cratered more than 80% in premarket trading after the release of the regulatory filing. Recently shares were down nearly 72%, wiping out nearly $5 billion from its market value.
The investigation found that Jian Liu, Luckin's chief operating officer, and several employees who reported to him, had engaged in misconduct, including fabricating sales. Liu and the employees implicated in the misconduct have been suspended, and Luckin said it will take legal action against those responsible.
Jian couldn't be located for comment.
The 2½-year-old company, which had hoped to overtake Starbucks as China's top coffee chain, said investors should not rely on its prior financial statements and earnings releases for the nine months ended Sept. 30. The coffee chain previously said net sales for the first nine months of 2019 were 2.9 billion yuan ($413 million).
Luckin said the internal investigation is at a preliminary stage and its estimate of the fabricated sales has not been verified by its independent auditor. The company's special committee has retained Kirkland & Ellis as its independent outside counsel and FTI Consulting as an independent forensic accounting expert.
Muddy Waters Research said in January that it bet against the stock in light of what it described as fraud and a "fundamentally broken business."
Luckin responded by calling the short seller's report "misleading" and "false."
"Luckin shows exactly why we need short sellers in the market. We believed this report was credible when we read it, and that's why we took a position," Muddy Waters founder Carson Block said in a statement to CNBC. "This is again a wake-up call for U.S. policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our markets."
The Chinese company raised $561 million in its initial public offering after pricing shares at $17. The stock began trading publicly on the Nasdaq in May, surging 18% in its debut. Shares peaked in January at $51.38 but tumbled as the coronavirus outbreak spread in China. The stock hit an all-time low of $4.90 per share Thursday morning. Excluding Thursday's plunge, the stock was up 54% since its IPO.
Luckin has tried to build a customer base with smaller locations formatted for convenience and offering steep discounts. In January, the company said that it had more than 4,500 locations in China, several hundred more than Starbucks. Starbucks has responded to the competitive threat by opening cafes in China designed for quicker pick-up and delivery and less seating.
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