Luckin offices raided by Chinese regulators as accounting scandal widens

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Chinese investigators raided the offices of Luckin Coffee Inc. as part of a multi-agency investigation into its finances, according to a person familiar with the matter, as pressure grows on the formerly high-flying coffee chain at the center of an accounting scandal.

The raid was carried out jointly by officials from different government agencies on Sunday as part of an investigation led by the China Securities Regulatory Commission into the beleaguered startup, said the person who was not authorized to speak publicly.

The agencies also involved in the investigation include the State Administration for Market Regulation and the State Taxation Administration, said the person. The CSRC, China’s securities regulator, started the investigation at the request of its U.S. counterpart the Securities and Exchange Commission, which oversees the Nasdaq exchange where Luckin’s shares are traded, said the person.

Luckin’s company representatives did not immediately respond to calls and texts for comment, but posted on its Weibo account that the company is cooperating with authorities and that store operations are normal. CSRC did not immediately respond to a request for comment about whether they are investigating Luckin. The State Administration for Market Regulation and the State Taxation Administration did not immediately respond to faxes seeking comment.

News of the raid and investigation was first reported by Dow Jones Newswires.

The Xiamen-based startup, once seen as a rising rival in China to Starbucks Corp., has seen shares plunge after the company said earlier this month that executives may have fabricated 2.2 billion yuan ($310 million) of sales transactions. If true, the faked sales represent a significant portion of the company’s total revenue.

Fall-out from the scandal has widened: major lenders like Morgan Stanley, Credit Suisse Group AG and Haitong International Securities Group are now at risk of having to book losses on margin loans to Luckin’s founder Lu Zhengyao.

Lu also founded Asia’s largest car rental company, Car Inc., which has halted trading after shares plummeted in the wake of Luckin’s woes.

Luckin’s share price fell more than 80 percent after the disclosure, and trading has been halted since April 7. The company’s auditor, Ernst & Young, prompted the company’s board of directors to form a special committee to oversee an internal probe into the matter.

China’s CSRC “strongly condemned” Luckin’s accounting fraud in a statement on April 3. The scandal has renewed concern among investors over lax corporate governance at some of the country’s fastest-growing companies.

— With assistance from Lucille Liu, Ken Wang and Daniela Wei

Lucille Liu, Ken Wang and Daniela Wei
Bloomberg News