Luckin Coffee and Affiliates Slapped With Fines by Chinese Regulator

A detailed investigation into the business practices of Luckin Coffee (OTC: LKNC.Y) by a key Chinese regulator has found widespread fraud and generated a raft of fines. The State Administration for Market Regulation announced Tuesday it has imposed financial penalties on two of the company's business units and a dizzying 43 outside companies. These fines total 61 million yuan ($9 million).

Luckin was also found to have misled its customers during certain promotions, and to have engaged in anti-competitive practices. The regulator also accused the company of using false data in its promotional activities, although it did not provide details.

Coffee beans on fire.

Image source: Getty Images.

The State Administration for Market Regulation named only three of those 43 companies alleged to have been complicit with Luckin; one is a business controlled by a onetime classmate of disgraced Luckin cofounder and ex-chairman Charles Lu.

The China-based coffee purveyor has been in legal hot water since activist investor Muddy Waters Research alleged that it artificially inflated its revenue in the final nine months of 2019. An internal investigation later found this to be true, with company officials exaggerating its take for the period by up to 40%.

Since then, Luckin has been in turmoil, with a series of executive firings and board of directors departures; its American Depositary Receipts have also been delisted from the Nasdaq Stock Market.

The State Administration for Market Regulation is not the only authority breathing down the company's neck. China's Ministry of Finance has also conducted an investigation into its activities, as has the U.S. Securities and Exchange Commission.

Luckin posted on its official Weibo account that it "carried out an overall rectification on the related issues," and that it will pay its share of the fines. These, however, are fairly low given the company's still-considerable size and revenue base.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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