Actuarial Outpost
 
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Risk Management
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions


Upload your resume securely at https://www.dwsimpson.com
to be contacted when our jobs meet your skills and objectives.


Reply
 
Thread Tools Search this Thread Display Modes
  #1  
Old 05-29-2020, 12:17 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 93,736
Blog Entries: 6
Default Corporate Fraud: Luckin Coffee

https://www.wsj.com/articles/behind-...ee-11590682336

Quote:
Behind the Fall of China’s Luckin Coffee: a Network of Fake Buyers and a Fictitious Employee
The highflying Chinese tech darling soared in value before admitting to revenue fabrication. Records show that bulk purchasers of its products included firms linked to the chairman and controlling shareholder.
Spoiler:
China's upstart Luckin Coffee Inc. grew at a blinding pace. It opened stores faster than Starbucks Corp., doubled its valuation to $12 billion eight months after going public and pleased its big-name investors in the U.S.

Then, on April 2, Luckin said many of its sales had been faked.

The shock brought a screeching stop to the three-year-old juggernaut, sending its stock plunging 75% overnight. Since then, investigators have delved into the books, executives have lost jobs and a stock exchange has moved to delist Luckin, but no one has explained just what went on inside the onetime corporate rocket ship.

Now, some light can be shed.

It turns out that Luckin sold vouchers redeemable for tens of millions of cups of coffee to companies that had ties to Luckin's chairman and controlling shareholder, Charles Lu, according to internal documents and public records reviewed by The Wall Street Journal. Their purchases helped the company book sharply higher revenue than its coffee shops produced.

Meanwhile, other internal documents showed an employee called Lynn Liang processing more than $140 million of payments for raw materials such as juice, delivery and human-resources services. Ms. Liang was fictitious, according to people familiar with Luckin's business.

The scale and audacity of deception, which the Journal found traced back to before Luckin's initial public offering on the Nasdaq Stock Market just a year ago, have stunned investors and confounded regulators. The company went from founding to public listing in less than two years.

Luckin on May 11 ousted its CEO, Jenny Qian, and chief operating officer, Jian Liu. It suspended or put on leave six others. Ms. Qian couldn't be reached for comment. Mr. Liu hung up when reached by phone. The only one of the other six who provided a comment said he was just following orders.

Mr. Lu didn't respond to questions from the Journal. On May 20, he said in a public statement: "My style may have been too aggressive and the company may have grown too fast, which has led to many problems. But I by no means set out to deceive investors."

He also apologized and restated his faith in the company in the statement, issued after Nasdaq moved to delist Luckin's shares, a decision Luckin said it would appeal.

Luckin said in response to Journal questions a board committee is continuing an investigation and it's responding to inquiries from regulatory agencies in the U.S. and China. It said it couldn't comment on specific details at this time.

"The Company continues to take appropriate measures to improve its internal controls and remains focused on growing the business under the leadership of its Board and current senior management team," Luckin said.

Nasdaq recently let Luckin's American Depositary shares resume trading after a suspension. They closed Wednesday at $2.59, versus a brief high above $50 in January.

Luckin's fall rekindled tensions over the U.S. Securities and Exchange Commission's inability to inspect financial records of Chinese firms to protect American investors.

The SEC is among agencies investigating Luckin, said people familiar with the matter. China's top business and commerce regulator has raided Luckin's headquarters in Xiamen, China, and taken records.

Luckin Coffee was born with a silver spoon in mid-2017, during China's recent technology funding boom. While private it raised more than half a billion dollars from investors including BlackRock Inc., Singapore sovereign-wealth fund GIC and a bevy of Chinese and U.S. investment funds. Credit Suisse and Morgan Stanley courted it and later won leading roles underwriting its public offering.

Luckin's controlling shareholder, who goes by Lu Zhengyao in addition to Charles Lu, previously started auto-rental firm CAR Inc. and a ride-hailing firm called Ucar Inc.

Ms. Qian, an executive at those ventures, co-founded Luckin with Mr. Lu and became its CEO. They fashioned it as a firm that could disrupt the Starbucks-dominated business of coffee sales in China.

Luckin provided a mobile app, with which it sent vouchers for free coffee to tens of millions of people, and coupons for deep discounts on later purchases. The discounts brought a latte down to about a third the cost of a similar drink at Starbucks.

Customers ordered and paid electronically, eliminating cashiers. Luckin promised to deliver coffee in 30 minutes.

By May 2018, seven months after opening its first cafe, Luckin had more than 500, in over a dozen cities. It said it obtained premium arabica coffee beans from Latin America and Africa, syrup from Italy and milk from New Zealand.

At a glitzy launch party Ms. Qian said the goal was to provide affordable premium coffee that people could access at any moment.

Days later, Luckin fired a salvo at Starbucks, which over two decades had helped lure a tea-drinking population to coffee. Luckin accused Starbucks of discouraging suppliers from doing business with rivals and filed an antimonopoly lawsuit. Starbucks said it welcomed competition. Luckin later dropped the suit.

A fundraising in June 2018 gave Luckin a billion-dollar valuation just a year after its founding. The cash supercharged its opening of cafes, many close to a Starbucks. The Seattle-based giant, too, began delivering coffee to Chinese customers.

Luckin's IPO in May 2019 raised $651 million and valued the company at around $5 billion on its first trading day. Mr. Lu high-fived colleagues.

Back in Xiamen, Luckin held a banquet for hundreds of business partners, investors, bankers and lawyers. Guests posed for photos at a booth mimicking the Nasdaq listing ceremony, and Ms. Qian presented the next goal: 10,000 stores in China by the end of 2021. Starbucks had fewer than 4,000 at the time.

"It was just explosive, humongous growth, and those numbers were very seductive to a lot of investors," said John Zolidis, a restaurant-industry analyst and president of Quo Vadis Capital, which said it has never bought or sold Luckin stock.

A group of Luckin employees had already begun helping sales along by engineering fake transactions, starting the month before the IPO, according to people familiar with the operation. The employees used individual accounts registered with cellphone numbers to buy vouchers for cups of coffee.

In late May 2019, orders began flooding in under a fledgling line of business that involved selling coffee vouchers in bulk to corporate customers, according to internal records reviewed by the Journal.

Alongside bona fide voucher sales, to a few regular clients such as airlines and banks, the records show numerous purchases by dozens of little-known companies in cities across China. These companies repeatedly bought bundles of vouchers, often in large amounts. Rafts of orders sometimes came in during overnight hours.

Qingdao Zhixuan Business Consulting Co. Ltd., situated in China's northern Shandong province, bought 960,000 yuan ($134,000) worth of Luckin vouchers in a single order, according to the documents. They show it made more than a hundred similar purchases from May to November 2019.

Mainland China and Hong Kong corporate-registry records link this company to a relative of Mr. Lu, to an executive of Mr. Lu's previously founded Ucar Inc. and to a Luckin executive, via a complex web of other companies and their directors and shareholders. Qingdao Zhixuan also has the same telephone number as a branch of CAR Inc. and is registered with a Ucar email address.

Luckin booked more than 1.5 billion yuan ($210 million) of corporate sales in this manner in 2019, dwarfing genuine purchases during the period, according to a Journal analysis of the records.

As money flowed in from the bulk sales, Luckin also made payments to more than a dozen companies listed in its records as providers of raw materials, delivery or human-resources services. Many didn't exist until April and May of 2019, corporate registration records show.

Chinese regulators who recently went through Luckin's systems found more than 1 billion yuan (about $140 million) in questionable supplier payments, according to the company's internal documents and people familiar with the matter. The documents showed payments were processed by Ms. Liang, the woman described as fictitious by people familiar with Luckin.

According to internal records and a person familiar with the matter, Luckin CEO Ms. Qian approved the payments and, in some instances, actively saw to the progress of the payment processes. The payments bypassed the chief financial officer, who then didn't oversee Luckin's finance and treasury department, the person said. The CFO, Reinout Schakel, declined to comment.

A look at registration records of companies that bought vouchers and others that received repeated supplier payments shows that many had links to Luckin, Mr. Lu or Mr. Lu's two previous ventures.

Some listed the same office addresses and contact numbers as branches of CAR Inc. or Ucar. Several were registered with email addresses of employees of those companies. One was registered with a Luckin email address.

A few of the companies had links to a relative or a friend of Mr. Lu. One regular bulk buyer of coffee vouchers, Date Yingfei (Beijing) Data Technology Development Co. Ltd., has the same phone number as a branch of CAR Inc. and a predecessor of Ucar.

Zhengzhe International Trade (Xiamen) Co. shows up in the documents as a supplier of raw material to Luckin.

Date Yingfei and Zhengzhe have the same legal representative, Wang Baiyin, a former classmate of Mr. Lu. Mr. Wang owns 60% of Date and 95% of Zhengzhe, according to corporate registration records. Mr. Wang couldn't be reached for comment.

Not all details of the operations could be learned. People familiar with these transactions surmised that, over time, the rafts of purchases and payments formed a loop of transactions that allowed the company to inflate sales and expenses with a relatively small amount of capital that circulated in and out of the company's accounts. It remains unclear what was the original source of funds to kick-start the transactions.

In November 2019, Luckin reported a 558% gain in third-quarter product sales, and projected around a 400% rise for the fourth quarter.

About two months later, after the stock price had roughly doubled, Luckin raised $865 million in a follow-on sale of shares and convertible notes. Its stock climbed further when Luckin said it had overtaken Starbucks by number of cafes in China and it would roll out numerous vending machines selling its drinks.

Then, on Jan. 31, Muddy Waters LLC, a U.S. short seller with a record of exposing misbehavior at Chinese companies, circulated an 89-page unattributed report on Luckin. The report said an examination of more than 11,000 hours of video footage of customer comings and goings, of more than 25,000 customer receipts and of observation by 1,500 individuals who visited Luckin outlets showed that much of the company's revenue must be fabricated.

Luckin's stock took a dive but started rising again after the company denied the allegations. The report was released around the time Luckin's auditor was set to review 2019 results.

Two months later, on April 2, came Luckin's explosive disclosure. Luckin said that as much as 2.2 billion yuan (about $310 million) of its 2019 revenue had been fabricated. That represented nearly half of its reported and projected sales from April to December.

Auditor Ernst & Young Hua Ming LLP indicated the following day it had sparked an internal investigation by finding that some management personnel at Luckin fabricated transactions, leading to inflation of income, costs and expenses.

Luckin's once $12 billion valuation was about $650 million after Wednesday trading.

"Luckin Coffee has been mired in an unprecedented crisis and a maelstrom of public debates," an internal company memo said on May 12. "We believe, with the help of all Luckin staff, the company will overcome the crisis and get back on track."


__________________
It's STUMP - meep on public finance, pensions, mortality, and more

LinkedIn Profile
Reply With Quote
  #2  
Old 05-29-2020, 03:08 PM
IANAE IANAE is offline
Member
CAS AAA
 
Join Date: Oct 2017
Posts: 281
Default

The China Hustle is an interesting documentary.
Reply With Quote
  #3  
Old 05-29-2020, 03:35 PM
Arthur Itas's Avatar
Arthur Itas Arthur Itas is offline
Member
CAS
 
Join Date: Feb 2004
Location: Atlanta
Studying for Prostate exam
College: Hard Knocks
Posts: 23,066
Default

Muddy Waters research has a pretty impressive track record.
Reply With Quote
  #4  
Old 05-29-2020, 03:39 PM
The_Actuarial_Borg The_Actuarial_Borg is online now
Member
SOA
 
Join Date: Dec 2019
Posts: 1,211
Default

Wirecard is probably going to be the next one to fall for fake payments.
Reply With Quote
  #5  
Old 05-29-2020, 07:09 PM
Colonel Smoothie's Avatar
Colonel Smoothie Colonel Smoothie is online now
Member
CAS
 
Join Date: Sep 2010
College: Jamba Juice University
Favorite beer: AO Amber Ale
Posts: 50,700
Default

Not so lucky I guess
__________________
Recommended Readings for the EL Actuary || Recommended Readings for the EB Actuary

Quote:
Originally Posted by Wigmeister General View Post
Don't you even think about sending me your resume. I'll turn it into an origami boulder and return it to you.
Reply With Quote
  #6  
Old 05-30-2020, 07:57 AM
IANAE IANAE is offline
Member
CAS AAA
 
Join Date: Oct 2017
Posts: 281
Default

Quote:
Originally Posted by Colonel Smoothie View Post
Not so lucky I guess
Depends which side of the trade one is on.
Reply With Quote
  #7  
Old 07-06-2020, 03:08 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 93,736
Blog Entries: 6
Default

https://www.wsj.com/articles/luckin-...ns-11593953644
Quote:
Luckin Coffee Probe Says Chairman Knew or Should Have Known of Fabricated Transactions
Report detailing the internal probe also said Charles Lu didn’t fully cooperate with investigation, according to a person familiar with the matter
Spoiler:
An investigation into the accounting misdeeds at Luckin Coffee Inc. has concluded that its chairman knew -- or should have known -- about the fabricated transactions that inflated the Chinese coffee chain's sales last year, according to a person familiar with the matter.

A report detailing the internal probe said Charles Lu, Luckin's co-founder and chairman, didn't fully cooperate with the investigation, the person said.

The probe was conducted by a special committee of Luckin's board with the assistance of law firm Kirkland & Ellis LLP. It found evidence that Mr. Lu had knowledge of certain related-party transactions that weren't properly disclosed, the person added.

Mr. Lu, in an emailed response to a request for comment, said: "Rumor! Not true!" A Luckin Coffee spokesman declined to comment.

Luckin, an upstart rival to Starbucks Corp. in China, listed on the Nasdaq Stock Market in May 2019. It revealed 11 months later that more than $300 million of its 2019 sales were fabricated. Its American depositary shares are in the process of being delisted from the exchange, and Luckin's market capitalization has fallen below $1 billion, from more than $12 billion in January this year.

The Wall Street Journal reported in May that a group of Luckin employees began creating fake sales transactions before the company's IPO, by booking sales of vouchers that could be exchanged for cups of coffee. Some vouchers were purchased by individual accounts, but the majority were bought during the second half of 2019 by little-known companies, many of which had links to Mr. Lu, according to documents reviewed by the Journal and people familiar with the matter.

In addition, a company with ties to Mr. Lu was recorded in Luckin's systems as a supplier of raw material and received payments from Luckin that were approved by its former CEO, Jenny Qian, the Journal's reporting showed.

On Sunday afternoon, a crucial Luckin shareholder vote took place in Beijing that crystallized a fight for control of the company's board. Mr. Lu, whose status as Luckin's controlling shareholder has been under threat, had put forth resolutions to remove four directors, including himself and representatives of two other Luckin shareholders, and replace them with his nominees. The result of the vote wasn't immediately known.

Last week, Luckin said an internal probe into the accounting misconduct was substantially complete, and that sales were inflated from April 2019 through the fourth quarter.

The company said it has decided to terminate a dozen employees who reported to Ms. Qian or former chief operating officer Jian Liu and who knew of or took part in the scheme, and subject another 15 employees to "disciplinary actions."

Luckin said funds supporting the scheme were funneled to the company through a number of third parties associated with its employees or related parties. It said 1.34 billion yuan ($190 million) in costs and expenses were inflated last year, and it is in the process of "terminating relationships with all third parties involved in the fabricated transactions."

The company didn't detail Mr. Lu's role in the scheme, but said directors proposed to remove him at a board meeting last week based on "documentary and other evidence identified in the Internal Investigation and its assessment of [his] degree of cooperation in the Internal Investigation."

Mr. Lu retained his seat last week, as the board needed a two-thirds majority to push him out. Three of its eight board members who are executives of Luckin voted against his removal, according to the person familiar with the matter.

Mr. Lu's control over the company is in doubt as creditors including Credit Suisse Group AG have moved to seize and sell a chunk of his shares to recoup a $533 million margin loan that he defaulted on.


__________________
It's STUMP - meep on public finance, pensions, mortality, and more

LinkedIn Profile
Reply With Quote
  #8  
Old 07-10-2020, 03:21 PM
cashneuro cashneuro is offline
Member
 
Join Date: Aug 2007
Posts: 31
Default

Well. That wasn't double.
Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 12:11 PM.


Powered by vBulletin®
Copyright ©2000 - 2020, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.29558 seconds with 9 queries