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Luckin Coffee Office Raided as China Regulators Probe Fraud at Starbucks Rival

Luckin said earlier this month that more than $300 million in sales may have been fabricated last year, triggering a plunge in shares and investigations in the U.S. and China.

Luckin Coffee Inc.  (LK)  confirmed Monday that it its being investigated by market regulators in China as its Nasdaq-listed shares continued to be suspended following revelations earlier this month that it may have "fabricated sales" reports that could have totaled more than $300 million of more than $300 million.

The China-based rival to Starbucks  (SBUX)  said it was "actively cooperating" with the State Administration for Market Regulation in Beijing after it reportedly raided the company's headquarters over the weekend. 

The statement followed a move by the China Securities Regulatory Commission earlier this month to investigate fraud claims linked to Luckin's  April 2 admission that around RMB2.2 billion ($310 million may bane been fabricated in a scheme linked to its former chief operating officer.

The Nasdaq, meanwhile, said Monday that shares in the group remain halted, following their first cessation on April 6, 

Luckin shares plummeted more than 75.5% on April 2 following news of its internal investigation to close at $6.40 each. They last traded at $6.39 each on April 6, giving it a market value of just over $1.1 billion.  

Beijing-based Luckin listed on the Nasdaq in May of last year with a market value of $4.2 billion after pricing its IPO at $17 each. It raised another $1.1 billion in a secondary offering in early January.

Luckin said it's assessing the impact of the investigation into the fake sales, which is traces back to the second quarter of 2019 and is linked to its  COO, on its current financial statements. 

"The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion," the company said in a filing with the U.S. Securities and Exchange Commission. "Certain costs and expenses were also substantially inflated by fabricated transactions during this period."

"The above figure has not been independently verified by the Special Committee, its advisors or the Company’s independent auditor, and is subject to change as the Internal Investigation proceeds," the company added.

Founded in 2017 by its current CEO, Qian Zhiya, Luckin has around 4,500 coffee outlets in China as it goes head-to-head with Starbucks in the world's biggest coffee market.

Luckin, which is backed by BlackRock  (BLKB)  and Singapore's powerful sovereign wealth fund, estimates consumption will rise to 15.5 billion cups by 2023, nearly 80% higher than last year's record levels.

Research firm Muddy Waters, which is headed by Carson Block, first alerted investors to allegations of fraud a Luckin in late January, calling the company a "fundamentally broken business" that was attempting to "instill the culture of coffee into China through cut-throat discounts and free giveaways".