China probing alleged fraud at Luckin Coffee, banks review IPO work

China's securities regulator said on Friday it would investigate claims of fraud at Luckin Coffee Inc, and sources said some of the banks involved in the Chinese chain's successful U.S. IPO last year were reviewing their work in the listing.

Shares of Luckin, which competes in China with Starbucks Corp, sank as much as 81% on Thursday in New York after it announced an internal investigation had shown its chief operating officer and other employees fabricated sales deals.

It said it has suspended COO Jian Liu and employees reporting to him following initial recommendations from a special committee that was appointed to investigate issues in its financial statements for the fiscal year ended Dec. 31, 2019.

The China Securities Regulatory Commission (CSRC) said on Friday it would investigate the case in line with any international investigation, and strongly condemned any financial misconduct by Luckin Coffee.

"Regardless of the listing location, listed companies should strictly abide by laws and regulations in relevant markets, and fulfil obligations to make truthful, accurate and complete disclosures," the regulator said.

Luckin did not respond to a request for comment on CSRC's observations.

At least two of the four banks who led Luckin's initial public offering (IPO) in May last year have begun reviewing their work for the float, according to four sources with knowledge of the scrutiny.

China International Capital Corp (CICC) and Morgan Stanley have begun informal investigations into the due diligence they did for the deal, according to four sources with knowledge of the situation.

The two, along with Credit Suisse and Haitong Securities, led Luckin's IPO, in which it raised $561 million at $17 per share, valuing the group at about $4.2 billion.

The four banks also worked on a follow-on share sale and a convertible bond worth a total of $980 million in January.

Morgan Stanley declined to comment. CICC, Credit Suisse and Haitong did not immediately respond to requests for comment.

Luckin's shares tumbled to $6.4 by the end of Thursday trading from $26.2 at Wednesday's close, wiping out about $5 billion in market capitalisation.

The company said on Thursday that its investigation had found that fabricated sales from the second quarter of 2019 to the fourth were worth about 2.2 billion yuan ($310 million).

That equates to about 40% of the annual sales projected by analysts, according to Refinitiv IBES data.

Liu has been the COO of the company since May 2018. He could not be immediately reached for comment.

Founded in June 2017, Luckin had been one of China's few successful IPOs in New York last year, with a number of prominent U.S. investors, including hedge funds, investing in the company's shares.