Trouble Brewing: Helping Luckin Coffee Uncover Fraud
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January 31, 2024
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When short-sellers alleged Luckin Coffee Inc., a U.S.-listed China-based company founded in 2017, of accounting fraud and employee misconduct, discredited public disclosures and questioned the overall health of the business, FTI Consulting was engaged by a Special Committee of the Board of Directors of Luckin Coffee as an independent forensic accounting expert to assist in an independent investigation into the allegations.1
Situation
Luckin Coffee promoted itself as a technology-based domestic rival to Starbucks, bringing different business models and concepts to the coffee chain industry. After its maiden fundraising round the startup was valued at USD1 billion, making it one of the quickest firms to reach “unicorn” status in China.2
Luckin Coffee continued to grow rapidly and expanded to more than 4,000 stores by 2020.
An anonymous short-selling report cited by Muddy Waters alleged that Luckin Coffee was involved in an elaborate accounting fraud.3 Luckin Coffee’s Board of Directors formed a Special Committee to undertake an independent investigation of the allegations. The Special Committee engaged Kirkland & Ellis as its legal advisor and FTI Consulting as its independent forensic accounting expert.4
Our Impact
- The Special Committee, Kirkland & Ellis and FTI Consulting were able to establish that the fabrication of transactions commenced in April 2019, and as a result, Luckin Coffee’s net revenue was overstated by approximately RMB2.12 billion.5
- Documentary evidence confirmed that Luckin Coffee’s chief executive officer, chief operating officer and certain employees reporting to them actively participated in the creation of the fabricated transactions and attempts to hide them. Their employment was ultimately terminated. 6
- Luckin Coffee was delisted from Nasdaq and agreed to pay a USD180 million penalty to the U.S. Securities and Exchange Commission7 in addition to reaching a USD175 million settlement of shareholder class action claims.8
Our Role
- Over the course of the Investigation, the Special Committee, Kirkland & Ellis and FTI Consulting reviewed more than 550,000 documents collected from more than 60 custodians, interviewed more than 60 witnesses, and performed extensive forensic accounting and data analytics testing.9
Published
January 31, 2024
Key Contacts
Senior Managing Director