Luckin's chairman, PE backers removed from board

Earlier this month, an internal investigation confirmed large-scale financial fraud at Luckin and a special committee recommended that Zhengyao Lu be replaced as chairman. He survived a shareholder vote but has given up the role – and his board seat – following an extraordinary general meeting, according to a statement.

Jinyi Guo, who became acting CEO of Luckin after Jenny Zhiya Qian was ousted, is now CEO on a permanent basis and chairman. Guo is another member of Luckin's founding team and previously worked for Lu at Ucar, a chauffeured car services business. Lu established Ucar having previously founded China Auto Rental, where Qian served as COO. He resigned as CEO of CAR in June.

David Li, founder and CEO of Centurium Capital, and Erhai Liu, founding and managing partner of Joy Capital, have also left the Luckin board. Centurium still held a 11.43% voting interest in the company as of June, having generated $231.8 million through a partial exit in January. Joy's voting interest was less than 1%. Lu and Qian between them held a voting stake of about 60%.

However, Lu is poised to lose his shares after a British Virgin Islands court ruled that the family trust through which he holds them could be wound up, the Wall Street Journal reported. A liquidator has been appointed to dispose of the assets.

Founded in 2018, Luckin raised more than $500 million in private funding from the likes of Centurium, Joy, GIC Private, Legend Capital, China International Capital Corporation (CICC) and BlackRock to fuel its rapid expansion plans. The company listed in May 2019 and had 3,680 outlets as of last September, although its losses were substantial.

The Luckin business model was always controversial and US short-seller Muddy Waters claimed in January that the company was inflating sales. This accusation was denied. However, Luckin admitted to suspected fabrication in April and its share price crashed. NASDAQ moved to delist the company.

The investigation found that fabrication of transactions starting in April 2019 resulted in net revenue for that year being inflated by approximately RMB2.12 billion ($300 million) – with over half of that coming in the fourth quarter. Moreover, costs and expenses were inflated by RMB1.34 billion. The company reported revenue of RMB2.93 billion for the nine months ended September 2019, up from RMB375 million a year earlier. It had previously projected fourth-quarter sales of RMB2.1-2.2 billion.

Qian and COO Jian Liu perpetrated the fraud by channeling transactions through third parties with ties to company employees. This reportedly involved bulk sales of discount vouchers to entities masquerading as corporate customers. At the same time, payments for raw materials and delivery services needed to satisfy these supposed coffee orders were made to fictitious suppliers.

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• Topics
• Greater China
• Consumer
• Technology
• Regulation
• China
• Centurium Capital
• Joy Capital