Luckin Coffee Trading Halted - Is Luckin Coffee Trading Halted - Luckin Coffee Announces Suspension and Lawsuit

FrontStreet Coffee - Luckin Coffee Stock Suspension

The coffee industry has been turbulent recently, with a globally escalating event - Luckin Coffee's fabrication of 2.2 billion yuan in transactions. What makes this situation particularly remarkable is that Luckin Coffee self-disclosed this fraud. As a publicly listed company, the consequences of such a severe falsification incident coming to light are predictable. Luckin Coffee's stock price has continued to decline, and as of now, Luckin Coffee's market value has evaporated by over $5 billion, directly causing Luckin Coffee Chairman Lu Zhengyao's margin call. According to Goldman Sachs disclosures, shareholders holding Luckin Coffee stock defaulted on pledged loans, and lenders executed forced liquidation on 76.4 million shares of Luckin stock pledged by Luckin Coffee shareholder Haode Investment Inc. (with Lu Zhengyao as the actual controller).

Currently, as a publicly listed company, Luckin Coffee's market value stands at $1.1 billion, with officials announcing a direct trading suspension while awaiting further information disclosure. Lu Zhengyao pledged $518 million worth of shares. Additionally, it's understood that Lu Zhengyao pledged $518 million in equity financing. Even if this portion of Lu Zhengyao's shares faces liquidation, his voting rights in Luckin Coffee will not decrease, but Luckin Coffee CEO Qian Zhiya's voting rights will significantly diminish.

Previously, an anonymous institution's short-selling report disclosed that Luckin's management had realized 49% of their stock holdings (or 24% of total issued shares) through stock pledges, exposing investors to the risk of margin calls that could trigger stock price crashes.

The report stated that Luckin's management emphasized they had never sold any of the company's shares; however, they had already cashed out through stock pledge financing. The number of pledged shares was nearly half of all their holdings, valued at $2.5 billion at the time.

Stock pledge financing is a common method for management to obtain financing without directly selling equity, which is often viewed by investors as a negative signal. It's also considered a key red flag in corporate due diligence because substantial stock pledges can create a negative cycle leading to stock price crashes.

Management can use their securities as collateral to obtain loans from banks and brokerage firms. When the value of pledged stocks declines, lending institutions require borrowers to provide more cash or collateral. If they cannot produce this money, lending institutions can sell the shares to recover debts, further depressing stock prices and triggering more demands for collateral.

Previously, regarding the 2.2 billion yuan fabricated transactions, Lu Zhengyao issued an apology, stating, "Since this incident, I have been extremely ashamed and heartbroken. After the falsification incident came to light, too many people have been disappointed and hurt." "The company expanded too rapidly over the past two years, causing many problems. Now we've fallen hard, and as chairman, I cannot escape responsibility! I sincerely apologize to everyone through my social circle - I'm sorry to everyone!"

Lu Zhengyao also said he accepts all questioning and criticism and will do his utmost to recover losses. Currently, multiple American law firms will file lawsuits against Luckin Coffee and specific management personnel. Luckin Coffee has also filed claims with relevant insurance companies for directors and officers liability insurance.

It's reported that Luckin Coffee purchased directors and officers liability insurance before its US listing, with total coverage reaching $25 million. The "co-insurance group" comprising Luckin Coffee's D&O insurance policy consists of four layers, with the "bottom co-insurance group" formed by eight Chinese-funded companies providing $10 million in coverage. Ping An Property & Casualty Insurance is the lead underwriter for the "bottom layer," underwriting 30% of the bottom layer share.

"Although Lu Zhengyao serves as a shareholder and chairman of Luckin Coffee, he resigned from the company's CEO position in April 2016 and changed to a non-executive director. Since then, he has not participated in the group's daily management. Additionally, Luckin Coffee's Chief Operating Officer Liu Jian has not served as a department director in the company since 2015."

Luckin Coffee's 2.2 billion yuan financial fraud incident has impacted the insurance sector. Currently, multiple American law firms will file lawsuits against Luckin Coffee and specific management personnel, while Luckin Coffee has filed claims with relevant insurance companies for directors and officers liability insurance. Information shows that Luckin Coffee purchased D&O insurance before its US listing, with total coverage reaching $25 million, and multiple domestic insurance companies participated in this underwriting in the form of a co-insurance group.

America's Thornton Law Firm LLP has reminded investors that it has filed a lawsuit against the company on behalf of Luckin Coffee (Nasdaq: LK) shareholders.

Thornton Law Firm LLP stated that investors who purchased Luckin Coffee stock or other securities between April 1, 2016, and April 2, 2020, are included in Thornton Law Firm LLP's lawsuit against Luckin Coffee, primarily related to Luckin Coffee COO Liu Jian's fabrication of false transactions.

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