BEIJING, April 23 (TMTPOST) China’s largest domestic coffee chain Luckin Coffee has been under investigation by the China Securities Regulatory Commission (CSRC) in the past few weeks, a person with knowledge of the matter said.

The Xiamen-based Nasdaq-listed company, which aimed to become China’s Starbucks through “burning money” strategies - hefty discounts in sales, may face severe punishments from Chinese and U.S. regulators, according to the source.

On April 3, the company announced an internal investigation into the conduct of former COO Liu Jian, who allegedly inflated 2019 sales by 2.2 billion yuan (about US$310.5 million), in its filing submitted to the U.S. Securities and Exchange Commission (SEC).

The company’s share price has plunged over 80% in less than four weeks and it is currently banned from trading on Nasdaq. 

The International Cooperation Department of CSRC has been working with SEC to collect and share information on Luckin’s operations and financials since the U.S. securities regulator requested cooperation from their Chinese counterpart in the matter.  

In another recent development, Thomas P. Meier, who was appointed as independent director of the Board in May 2019, resigned on Tuesday from the Board and from the Audit Committee of the Board, effective immediately. Following Meier’s resignation, the Audit Committee consists of three independent directors.

Meanwhile, Chinese investors are also sipping the bitter taste of Luckin Coffee. Some of them have filed lawsuits against Luckin Coffee at the Intermediate People’s Court of Xiamen City.

“A legal suit was filed against Luckin Coffee by mail at the Intermediate People’s Court of Xiamen today. There are 10 cases in the first batch,” Yang Zhaoquan, a lawyer at Beijing Vlaw Law Firm said. “One investor of Luckin Coffee in China bought the company’s shares at US$26.9 and sold them at US$6.3, suffering a loss of over 70%.”

SEC Warns Investors against Chinese firms

SEC chair Jay Clayton on Wednesday warned U.S. investors against buying shares of Chinese companies due to their murky disclosures.

“We have struggled for a long time with the Public Company Oversight Board (PCOB) getting access to audit work papers. The Board still does not have access,” Clayton told FOX Business Network. “It's a source of frustration for us because we don't have the same oversight with respect to operations in China from a financial reporting point of view that you do in most of the rest of the world.”

His warning came after hawkish U.S. lawmakers and former officials reinforced efforts to persuade the Trump administration to suspend plans to invest billions of federal pension funds in U.S.-listed Chinese firms, which do not follow the same auditing rules their U.S. counterparts have to follow.

The SEC issued guidance on investing in emerging market on Tuesday, which singled out Chinese companies as difficult to oversee.