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Is Luckin Coffee Doomed After Misconduct Charges?

Luckin Coffee Inc. (NASDAQ: LK) shares cratered on Thursday after the company announced that it has formed a committee of three independent directors to investigate “misconduct, including fabricating certain transactions.” In simpler terms, the numbers being represented by this Chinese version of Starbucks are potentially false.

The investigation will span the second through fourth quarters of 2019. It will also include Jian Liu, chief operating officer of Luckin, who has been suspended, along with other staff implicated in the misconduct.

Additionally, Luckin has suspended or terminated contracts and deals with parties involved in the investigation.

The company noted that the investigation is in preliminary stages, and it is still trying to understand the full financial implications. In the SEC filing, Luckin said that “several employees” reporting to Liu had engaged in misconduct that included fabricating transactions, adding that fake transactions that amount to around $310 million. Also, other costs and expenses during this time were “substantially inflated.”

According to Luckin:

As a result, investors should no longer rely upon the Company’s previous financial statements and earning releases for the nine months ended September 30, 2019 and the two quarters starting April 1, 2019 and ended September 30, 2019, including the prior guidance on net revenues from products for the fourth quarter of 2019, and other communications relating to these consolidated financial statements.

Needless to say, class action lawsuits are popping up now for disgruntled shareholders who believe Luckin Coffee may have released misleading information in relation to its stock.

Luckin Coffee stock traded down about 74% at $6.80 on Thursday, in a 52-week range of $4.90 to $51.38. The consensus price target is $49.18.