In a dramatic boardroom struggle, a number of Directors on Luckin’s board attempted to remove the sitting Chairman but failed to get the two-thirds majority required.
Charles Zhengyao Lu will remain for the time being as Chairman of the disgraced company, which has been found to commit massive fraud. The company had already removed a number of top executives including the CEO.
Meanwhile, the company reported that it has “substantially” finished its independent internal investigation into the sales fraud scandal.
The independent investigation found that Luckin Coffee’s sales in 2019 were inflated by 2.12 billion yuan ($300 million) and its expenses by 1.34 billion yuan ($190 million). The fraud began in April 2019, a month before Luckin made its public market debut in the United States.
Essentially the victims of the fraud are the shareholders who purchased shares based on the stated results of the company, which later turned out to be falsified.
Luckin Coffee revealed the financial scandal and independent investigation a year later, estimating that about 2.2 billion yuan($311 million) of its 2019 sales were fabricated, slightly above the investigation’s final findings.
Throughout the investigation, investigators reviewed over 550,000 documents and interviewed more than 60 witnesses. In forensic investigations of this nature, auditors use special software that is able to analyse large volumes of documents to identify suspicious areas that they then focus in a ‘deep dive’ review.
Evidence showed that former CEO Jenny Zhiya Qian, former COO Jian Liu, and other employees reported the fabricated transactions and used third parties to funnel funds supporting the falsified transactions.
In Germany, the recent fraud of financial services company, Wirecard, along with Luckin and others are pushing the question of whether auditors, who sign off on the company accounts are doing their job. Some are calling for auditors to be held partially responsible if they miss large-scale fraud when signing-off accounts.
Luckin’s shares were delisted from the Nasdaq. The exchange had served the company with two delisting notices, one in May related to the sales fraud and a second in June for not filing its annual report.
