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Luckin Coffee Shares Plunge After China Launches Probe in Fake Sales Scandal

Luckin said fabricated sales worth more than $300 million are being investigated, and that investors can no longer rely on its prior financial guidance.

Luckin Coffee Inc.  (LK) , a China-based rival to Starbucks  (SBUX) , said Thursday that it has launched an investigation into "fabricated sales" reports that could have totaled more than $300 million.

Nasdaq-listed 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 chief operating officer, on its current financial statements. However, it cautioned investors that they can no longer rely on the company's prior guidance.

"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 ($310 million)," 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.

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Luckin shares plummeted more than 73.4% in mid-day trading following news of the investigation to change hands at $6.96 each, giving it a market value of just over $1.75 billion. Starbucks shares, meanwhile, were marked 2.6% higher at $64.25 each. 

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. 

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".