China is investigating start-up Luckin Coffee (LK) - Get Report, who has been accused of fraudulent financial reporting. The company is now hiring a special committee to investigate the matter, the company said in a Thursday press release.
Muddy Waters Research, a firm that conducts original research on companies it detects fraudulent behavior in and takes short positions in the stocks of those companies, published a lengthy report outlining how Luckin has been fraudulent.
Luckin may have been untrue about $300 million worth of sales over some period of time. Annual sales are roughly $1 billion.
Muddy Waters wrote in its report, "Right after its USD 645 million IPO, the Company had evolved into a fraud by fabricating financial and operating numbers starting in 3rd quarter 2019. Luckin knows exactly what investors are looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence.”
The firm said Luckin lied about the amount of marketing spend and that it inflated items per store in the third quarter of 2019 by 69%. Muddy Waters said Luckin inflated the average selling price by 12.3% “to sustain the business model,” the firm said.
Potentially making any legal matters worse for Luckin, the company responded in February to a prior report by saying, "Luckin Coffee categorically denies all allegations in the report."
Luckin coffee shares fell 70% Thursday.
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