US $180 million fine smashed on lucky coffee

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After paying a sky high fine of $180 million, lucky coffee is expected to reach a settlement with the US Securities and Futures Commission on the alleged financial fraud of some of its former employees.
A $180 million fine fell on lucky coffee.
On December 16 local time, the securities and Exchange Commission (SEC) announced that lucky coffee had cheated investors by seriously misrepresenting the company’s revenue, expenses and net operating losses. Lucky coffee agreed to pay a $180 million fine to settle the charges. This is so far the SEC issued the largest penalty to China capital stock.
Subsequently, lucky coffee announced on its official microblog that the company had reached a settlement with the US Securities Regulatory Commission on the suspected financial fraud of some former employees, and the company and its stores are operating stably.
Carolyn M. Welshhans said the revenue disclosed by lucky coffee to investors was false, and the settlement with lucky coffee was designed to ensure that the injured investors had the best chance to get relief.
Partners of overseas law firms told 21st century economic news that through the settlement, lucky coffee is expected to be free from other lawsuits filed by US regulators, but it will eventually face class action lawsuits from relevant investors.
The biggest penalty ticket in the history of China capital stock Co., Ltd
In April 2020, lucky coffee disclosed financial fraud, saying that the company had forged transactions from the second quarter to the fourth quarter of 2019, involving sales of about 2.2 billion yuan.
After the announcement, lucky coffee’s opening fell by more than 80%, triggering the circuit breaker to suspend trading, and triggered the circuit breaker six times in the next 40 minutes.
Fortunately, NASDAQ officially stopped trading in June. It has been listed in the United States for more than 400 days, and its share price was $1.38/share at the time of delisting, which is 90% lower than the offering price of $17 when it was listed.
The SEC said in the indictment that between April 2019 and January 2020 at least, lucky coffee made up more than $300 million in retail sales through three independent purchase plans, using related parties to falsify sales transactions. Some employees of lucky coffee tried to cover up the fraud by overstating the company’s expenses by more than $190 million, creating a false operational database, and tampering with accounting and bank records to reflect fraudulent sales.
The indictment also alleges that lucky coffee overstated its revenue and expenditure and seriously underestimated its net loss in its publicly disclosed financial statements in 2019. Its net revenue in 2019 is about 2.12 billion yuan, and its costs and expenses are overstated by 1.34 billion yuan in 2019. During the fraud, lucky coffee raised more than $864 million from debt and equity investors.
Stephanie Avakian, head of SEC’s executive arm, said, “public issuers entering our market must not provide false or misleading information to investors.” Based on this, the SEC has filed a lawsuit alleging that lucky coffee violated the anti fraud, reporting, books and records, and internal control requirements of the federal securities law. Ruixing coffee, on the other hand, agreed to reach a settlement without admitting or denying the charges, including a permanent injunction and a fine of 180 million US dollars. At present, the settlement still needs to be approved by the court.
At the latest exchange rate, 180 million U.S. dollars, or 1.176 billion yuan, is also the largest ever fine issued by the SEC to China capital stock after focus media.
It is worth mentioning that the settlement also includes a “permanent ban”, which is also of great interest to lucky coffee.
Tiger securities investment research team explained to the 21st century economic reporter that the permanent ban refers to the instructions to individuals or entities to permanently avoid certain activities or take specific actions.
However, lucky coffee’s announcement did not confirm that the company’s main body or a permanent ban on an individual. If the company is targeted at the main body of the company, the prohibited object is the company of lucky coffee’s U.S. listed entity base in Cayman; if the ultimate target is the senior executives, they are likely to be members of the board of directors, and they may be prohibited from holding management positions of listed companies or entering relevant capital fields.
Tiger securities investment research team said that as the court has not yet approved, it is not clear whether the ban will be implemented, and it will be further clarified if implemented in the future.
“In any case, if the settlement is reached, lucky coffee will not be subject to other lawsuits filed by the U.S. regulatory authorities.” The partners of the aforementioned overseas law firms said so.
Class action may end in settlement
However, the settlement does not mean the end of lucky coffee’s “trouble”. The company will also face class action brought by investors.
On June 28, 2020, Ruixing coffee has been officially suspended for delisting, which means that the company has been delisted on the NASDAQ main board. “In this case, investors are almost bound to hold the company accountable,” said a domestic investment bank in charge of overseas business.
According to media reports, the class action case of lucky coffee in the United States has designated the chief plaintiff and the law firm. The chief plaintiffs are sjunde AP fonden, a Swedish Pension Fund, and Bernstein litowitz, the Louisiana Police Pension and rescue fund in the United States. In this case, they are the law firms representing all investors.
According to data, the average amount of compensation for class action cases of securities in the United States in 2019 is US $30 million. However, the market has taken the period since 2020 as the time period, referring to the highest and lowest stock prices and total equity of lucky coffee, it is roughly calculated that lucky coffee will face a total compensation of about 11.2 billion US dollars.
“I personally think this calculation is a little simplistic, and it is impossible to judge that the decline of lucky coffee’s share price is simply caused by financial fraud.” The overseas partners said the class action against lucky coffee is likely to end in settlement, given the difficulty of providing evidence.
He also said that in the case of Ruixing coffee fraud, the company and relevant responsible persons will still bear the main responsibility, and it is unlikely that investment banks and audit institutions will be involved. “At the moment, it’s lucky coffee that provides the problematic financial data.”

It is worth mentioning that after delisting, lucky coffee has entered the US pink list market and become “unlisted securities”. Tiger securities investment research team said that lucky coffee is still trading in the pink list market. Due to the low threshold of supervision and information disclosure in the pink list market, there is no need to file documents in the sec. Whether to withdraw from the pink list market in the future depends on the company’s willingness.
China’s regulatory authorities have also kept a great deal of attention to Ruixing coffee’s counterfeiting case. On July 31, the Ministry of finance, the State Administration of market supervision and the China Securities Regulatory Commission (CSRC) successively issued investigation circulars on the financial fraud of lucky coffee. The CSRC disclosed at that time that it had served a notice of administrative penalty to the parties involved in the case. If the relevant subject of responsibility is suspected of committing a crime, it will be transferred to the public security and judicial organs for further accountability. On October 12, the State Administration of market supervision imposed a fine of RMB 2 million on lucky coffee and five companies that helped it conduct false publicity.
“To further deepen international regulatory cooperation and the two-way opening up of the capital market, it is inevitable to strengthen international regulatory cooperation. We will always uphold an open attitude and sincerity of cooperation, actively strengthen extensive cooperation with overseas regulators and international financial organizations, jointly promote the settlement of audit supervision problems of China capital stock companies, and earnestly safeguard the legitimate rights and interests of investors in various countries We will crack down on financial fraud in cross-border listing and securities issuance, and maintain the international image of China’s enterprises. ” Fang Xinghai, vice chairman of the Securities Regulatory Commission, recently said so publicly.
(author: man Le, editor: Zhu Yimin)