China’s Investors Take Luckin Coffee to Court for Painful Stock Loss

Luckin Coffee (Source: Morning Brew)

Lawsuit filed by China’s domestic investors against Luckin Coffee‘s fabricated sales fraud has been proceeding by Xiamen Intermediate People’s Court, according to a lawyer surnamed Yang with knowledge of this case.

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This comes as Luckin Coffee stock tumbled, taking a toll on some investors. Yang said there is one investor selling the stock at USD 6.3 compared to when he brought it at USD 26.9, facing a 70% loss.

Luckin Coffee, China’s upstart rival to Starbucks, was shorted by Muddy Waters Research on Jan. 31 with an 89-page report detailing the daily consumer traffic in its offline stores and the exaggerated advertising revenue.

While impacted by the report, Luckin’s share price rebounded after a big drop. According to Carson Block, founder of Muddy Waters Research, the reason the stock did not continue to slump might be the indifference of its major holders.

“Large sophisticated hedge funds say it is a big fraud,” Carson explained, “but they still hold stock.”

On April 2, Luckin Coffee said one of its top executives and other employees had faked transactions of about 2.2 billion yuan. However, Carson said in his interview with Tencent News that he thinks there is more to what actually happened than what’s been released.

The explosive scandal of Luckin Coffee drew heated online discussions and unexpected booming sales.

A video jokingly portrayed Luckin as a company which raises fund from overseas investors and benefits domestic consumers with discount vouchers went viral on Weibo. It is also reported that Luckin’s multiple offline stores witnessed surges in orders the next day that hit record levels.

Luckin’s fraud was a wake-up call for investors and regulators to carefully scrutinize the market and capital. The China Banking and Insurance Regulatory Commission said recently that it has no tolerance for Luckin’s illegal operations and will collaborate with administrations to investigate this case, promoting a healthy market environment.