Photo: Visual China Group via Getty Images/Visual China Group via Getty Images

Luckin Coffee (Nasdaq: LK), a Chinese rival to Starbucks that went public last year at a $4.3 billion valuation, disclosed that its chief operating officer fabricated around $310 million in 2019 sales.

Why it matters: This raises big questions about due diligence by Luckin's IPO bankers, who subsequently worked on both a secondary share sale and convertible bond offering that relied on the inflated data.

  • Market reax: Luckin went public at $17 in May 2019. It hit a closing high of $50.02 per share in January, before the coronavirus knocked it down to $26.20 on Wednesday. One day later, it closed at $6.40 per share and is poised to open even lower today.
  • The bottom line: "An anonymous report publicized by U.S. short-seller Muddy Waters earlier this year raised suspicions about the company’s accounting. Luckin said at the time that the report was false, misleading and irrelevant. But in fact it seems very relevant. One interesting allegation, beyond the fabrication of revenue, is that Luckin manipulated order numbers in its app to give an embellished image of its business. More sophisticated investors relied on third-party vendors to collect data beyond companies’ financial statements. But if this accusation is well-founded, that means they need to pay even closer attention to the question of what data can reasonably be trusted." Jacky Wong, WSJ

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