Luckin Coffee Inc. (NASDAQ:LK) has confirmed the company is under investigation by a Chinese regulator.

What Happened

Luckin, a rival to Starbucks Corporation (NASDAQ:SBUX) in China, is being investigated by the State Administration for Market Regulation. The company stated that its stores remain open, and it is actively cooperating with the ongoing investigation, reported BBC.

Separately, a parallel probe is underway by the China Securities Regulatory Commission (CSRC), which had strongly condemned financial mismanagement by Luckin earlier this month.

Luckin has been under fire since it revealed on April 2 that its chief operating officer Jian Liu and several employees reporting to him, had fabricated fraudulent transactions to the tune of $310 million to boost the company’s sales.

Liu and other employees have since been suspended, and the contracts of all parties involved in the fraud terminated.

Why It Matters

Numbers from Thinknum, a data-driven investment platform, reveal that Luckin Coffee had emerged as the fastest-growing coffee chain in the world. In December 2019, the Chinese coffee chain had 4500 stores scheduled to open by year-end, compared with Starbucks' 4300.

Luckin Coffee said investigations had revealed fabricated numbers to the extent of nearly 40% of its estimated annual sales from second to the fourth quarter of last year, according to BBC.

Sina Finance, a website run by Sina, a Chinese internet portal, reported the CSRC investigation team was sent to Luckin Coffee to respond to damage caused to legitimate rights and interests of domestic investors, by a company that issues securities and conducts trading activities outside of China. 

The investigation is also conducive to maintaining the reputation of Chinese listed businesses abroad and preventing obstacles to companies wishing to go public in the U.S. in the future, according to Sina Finance.

The fraud at Luckin has cast doubts on the credibility of Chinese firms listed on exchanges in the United States.

Trading in Luckin Coffee shares has been suspended by Nasdaq since April 7 and will stay suspended until the market operator receives the additional information it requested from Luckin.

Photo Credit: Courtesy of Luckin Coffee Instagram.