Luckin Coffee shares sink after COO accused of financial misconduct

(Reuters) - Shares of Luckin Coffee Inc (NASDAQ: LK) sank as much as 81% on Thursday after the Chinese coffee chain said an internal investigation had shown that its chief operating officer and other employees fabricated sales transactions.

The company suspended COO Jian Liu and employees reporting to him following initial recommendations from a special committee, which was appointed to investigate issues in its financial statements for the fiscal year ended Dec. 31, 2019.

Luckin said the investigation had found that fabricated sales from the second quarter of 2019 to the fourth were about 2.2 billion yuan ($310 million). That equates to about 40% of the annual sales projected by analysts, according to Refinitiv IBES data.

Liu has been the COO of the company since May 2018. He could not be immediately reached for comment.

Luckin, which competes with Starbucks Corp (NASDAQ: SBUX), had been one of China's few successful initial public offerings last year, with a number of prominent U.S. investors, including hedge funds, investing in the company's shares.

However, investors said they were beginning to hear rumblings that there was something amiss at the company and some received an anonymous report alleging that the company was fabricating some numbers.

Earlier this year, short-seller Muddy Waters Research shorted the stock, citing a report alleging that Luckin fabricated financial and operating numbers from the third quarter of 2019.

At the time, Luckin called the report's methodology flawed, the evidence unsubstantiated and said that the allegations were "unsupported speculations and malicious interpretations of event."

"We believed this report was credible when we read it, and that's why we took a position. 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," Muddy Waters said in an e-mailed statement on Thursday.

"Luckin shows exactly why we need short sellers in the market."

The funds which invested in Luckin, including Point72 Asset Management, formerly known as S.A.C. Capital Advisors, declined to comment.

Shares of the company were last down 76.3% at $6.2. They earlier hit a record low of $4.9.

Luckin asked investors not to rely on its financial statements and earning releases for the nine months ended Sept. 30 and the two quarters starting April and July 2019.

($1 = 7.0963 Chinese yuan)

(Reporting by Nivedita Balu in Bengaluru and Svea Herbst-Bayliss in Boston; Editing by Bernard Orr, Anil D'Silva & Aditya Soni)

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