Cohen v. Luckin Coffee Inc.

Court: United States District Court for the Southern District of New York
Case Number: 1:20-cv-01293-LJL
Judge: Hon. Lewis J. Liman
Class Period: 05/17/2019 - 04/06/2020
Case Contacts: Salvatore J. Graziano, John Rizio-Hamilton, Jai K. Chandrasekhar, Kate Aufses, Amanda Boitano

This is a securities class action on behalf of all persons or entities who: (1) purchased or otherwise acquired the publicly traded securities of Luckin Coffee Inc. (“Luckin Coffee” or the “Company”) during the period from May 17, 2019 through April 6, 2020, inclusive (the “Class Period”); (2) purchased or otherwise acquired Luckin Coffee American Depositary Shares (“ADSs”) in or traceable to the Company’s initial public offering of ADSs conducted on May 17, 2019 (the “IPO”); and/or (3) purchased or otherwise acquired Luckin Coffee ADSs in or traceable to the Company’s secondary public offering of ADSs conducted on January 10, 2020 (the “SPO,” and with the IPO, the “Offerings”).

Investors filed several related actions against Luckin Coffee, certain of its directors and officers, and underwriters of the Company’s IPO and SPO, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. On May 15, 2020, District Judge Lewis J. Liman of the U.S. District Court for the Southern District of New York consolidated the related actions. On June 12, 2020, Judge Liman appointed Louisiana Sheriffs’ Pension & Relief Fund as co-Lead Plaintiff and Bernstein Litowitz Berger & Grossmann LLP as co-Lead Counsel for the class.

Luckin Coffee’s Alleged Fraud

Luckin Coffee is a coffee retailer founded in 2017 based in Xiamen, the People’s Republic of China. Luckin Coffee owns and operates stores selling food and beverages, as well as a mobile application for food and beverage purchases. The Company conducted an IPO of its ADSs on May 17, 2019, and SPO with a concurrent Convertible Note Offering on January 10, 2020.

The action alleges that, throughout the Class Period, including in connection with the IPO and the SPO, Luckin Coffee promoted its technology-driven retail model using “big data analytics, [artificial intelligence], and proprietary technologies” to drive sales of coffee and other products and develop revenue and expense models that ensure accurate and transparent reporting. Luckin Coffee reported record-setting revenue growth and claimed that its stores were profitable.

In reality, Luckin Coffee’s stores were operating at substantial losses, the Company’s financial health was in jeopardy, and Luckin Coffee’s store sales data were simply fabricated over multiple quarters. As a result of these misrepresentations, Luckin Coffee ADSs traded at artificially inflated prices throughout the Class Period.

The truth about Luckin Coffee was revealed in a series of disclosures. First, on January 31, 2020, Muddy Waters Research published a report stating that Luckin Coffee had fabricated portions of its financial statements beginning in the third quarter of 2019, citing “smoking gun evidence” such as thousands of hours of store video, customer receipts, and monitoring of the Company’s mobile application data. On this news, the price of Luckin Coffee ADSs fell from $36.40 per share on January 30, 2020, to $32.49 per share on January 31, 2020. On February 3, 2020, Luckin issued a press release dismissing Muddy Waters’s conclusions. The Company “categorically denie[d] all allegations in the [Muddy Waters] Report” and assured investors that the “methodology of the Report is flawed, the evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events.”

Notwithstanding the aggressive defense of its operations, on April 2, 2020, Luckin Coffee disclosed that an internal investigation had found that over $300 million in reported sales simply did not exist and that Luckin Coffee’s Chief Operating Officer Jian Liu and several of his direct reports had fabricated these transactions beginning in the second quarter of 2019. On this news, the price of Luckin Coffee ADSs fell from $26.20 per share on April 1, 2020 to $6.40 per share on April 2, 2020—a decline of over 75%.

Finally, on April 6, 2020, Goldman Sachs & Co. LLC announced that an entity controlled by Luckin Coffee’s Chairman Charles Zhengyao Lu had defaulted on a $518 million margin loan secured by Luckin Coffee ADSs, which had been pledged as collateral by the Company’s founders—Lu and Chief Executive Officer, Jenny Zhiya Qian—for these personal loans. On this news, the price of Luckin Coffee ADSs fell from $5.38 per share on April 3, 2020 to $4.39 per share on April 6, 2020, another 18% decline. Trading of Luckin Coffee ADSs was halted on April 6, 2020 by the NASDAQ and did not resume until May 20, 2020.

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