Luckin case may damage other US-listed firms

Source:Global Times Published: 2020/4/7 23:03:40

Illustration: Luo Xuan/GT

As the coronavirus pandemic sweeps the world, listed Chinese companies are facing another heavy blow dealt by the accounting scandal at Luckin Coffee. Coming at a sensitive time, with global markets fluctuating sharply amid the coronavirus crisis, the Luckin case may become the rotten apple that spoils the barrel - with the credibility of all listed Chinese companies as collateral damage.

The Nasdaq-listed Chinese coffee chain has been in the spotlight for past week after the company revealed in an US Securities and Exchange Commission filing that it has launched an internal investigation into an alleged 2.2 billion yuan ($310 million) fraud. That led its stocks to drop 75.57 percent on Thursday, causing huge losses for investors.

Luckin's alleged fraud will have a series of direct consequences. For starters, it will cause even heavier losses for its investors. As more details are revealed in the future, the company may face class action lawsuits, penalties, demands for compensation, and even compulsory delisting, all of which will bring huge losses for investors.

The company's shareholders will inevitably suffer losses. It's reported that a number of law firms in the US have filed class action lawsuits against the company, accusing it of making false and misleading statements in violation of US securities laws. These class actions may lead to huge compensation requirements and legal liabilities.

Luckin employees are the most vulnerable group embroiled in the scandal, and may face salary cuts and even layoffs.

Broader negative impacts will come as collateral damage from Luckin's case. The company's related investment institutions, intermediaries, and US-listed Chinese companies will all suffer negative impacts. The impacts of the case have already begun gradually appearing in these areas. Though intermediaries such as auditors and investment banks have not been added as defendants in the class action to date, it's entirely possible they will be added in the future.

The Luckin case will also have knock-on effects on other US-listed Chinese companies. The CEO of a large Chinese retail group - also listed in the US - said cases like this are the "rotten apples" that hurt credibility of all listed Chinese companies, and the cost is extremely high.

Although Luckin Coffee is not registered or listed in China, China's securities regulator said on Friday that it would investigate the case in line with any international investigation and strongly condemned any financial misconduct.

Luckin's alleged fraud not only damages the interests of investors and harms employees, but also damages the reputation of listed Chinese companies. The case must be investigated thoroughly and relevant punishments should be handed if necessary.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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