Chinese coffee chain Luckin Coffee’s stock plunged more than 80% on April 2, 2020 after it revealed in an SEC filing that it was internally investigating an alleged fraud on the part of its former COO, Jian Liu. The allegations surround fraudulently fabricated transactions that involved a substantial part of Luckin Coffee’s revenue during the last three quarters of 2019. The embattled company stunned investors by disclosing that as much as 2.2 billion yuan ($310 million) in sales had been fabricated by the COO and some of the employees who worked under him. The falsified sales represented close to half of Luckin Coffee’s reported or projected revenue for the nine-month period.
In a few short years, Luckin Coffee displaced Starbucks as the coffee retail and delivery leader in China. But its stock is down another 18% (approximately) as investors continue appreciate the ramifications of the disclosure in the SEC filing and the re-positioning of the competitive Chinese coffee market. Immediately before its initial public offering (IPO) in May 2019, Luckin Coffee was valued at roughly $4 billion. Now, the company’s market cap is approximately $1.1 billion.
The steep dive in valuation is putting enormous pressure on the banks that extended loans to buy Luckin Coffee’s stock on margin. Buying on margin is the act of borrowing money to buy securities, which includes buying an asset where the buyer pays only a percentage of the asset’s value and borrows the rest from the bank or broker. The broker acts as a lender and the securities in the investor’s account act as collateral. Many investors who bought Luckin Coffee’s stock on margin are facing margin calls, which occur when the value of an investor’s margin account falls below the broker’s required amount. A margin call is the broker’s demand that an investor deposit additional money or securities so that the account is brought up to the minimum value.
Lax & Neville has significant experience with complex securities cases involving stocks, margin accounts, and fraud. If you have suffered investment losses from your broker’s or investment advisor’s purchase of stocks in your account, securities on margin, or fraud/misrepresentations in connection with financial instruments, contact Lax & Neville LLP today at (212) 696-1999 and schedule a consultation.