Starbucks of China could soon be de-listed over fraud allegations

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luckin coffee shares halted luckin coffee investigation Up To 25 Cups of Coffee A Day
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Shares of Luckin Coffee Inc (NASDAQ:LK) were halted today for pending news. At the time of this writing, the stock had not resumed trading, and it’s unclear what the pending news is. However, there are some possibilities.

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Q1 2020 hedge fund letters, conferences and more

Luckin Coffee stock halted: chairman, CEO default

On Monday, a press release issued by Goldman Sachs said Haode Investment defaulted on a $518 million margin loan to a collection of banks. Goldman was one of those banks. Haode is controlled by the family trust of Luckin Coffee Chairman Charles Zhengyao Lu. The shares that were pledged as collateral on the loan were controlled by CEO Jenny Zhiya Qian's family trust.

Almost 611 million shares of Luckin Coffee stock were put up as collateral for the loan, according to Goldman Sachs. The investment bank said the lenders have begun the enforcement process against the collateral in connection with the default on the loan. That includes conversion of the Class B ordinary shares into American Depository Shares.

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Goldman also said that if the syndicate of banks sold all the pledged shares, Qian's voting rights in the coffee chain would "decrease significantly." However, Lu's voting status would not change much.

Lone Pine exits the stock, Chanos closes short

Steve Mandel's Lone Pine Capital did have a sizable position in Luckin Coffee. S&P Capital IQ's data indicates that the fund was the Chinese coffee chain's seventh-biggest shareholder. A regulatory filing revealed that the fund's stake in Luckin Coffee fell below 5% the same day the company disclosed that a significant portion of its sales had allegedly been fabricated. The following day, the stake fell to zero.

Short-seller Jim Chanos of Kynikos Associates told CNBC that he did have a short position in Luckin Coffee earlier this year, having taken it after Muddy Waters' Carson Block published his thesis. However, Chanos closed the position on Thursday. The company revealed then that an internal investigation had uncovered about $310 million in fabricated sales.

Luckin Coffee halted, could face delisting

China Daily reports that Luckin Coffee faces the possibility of delisting after it reported the fabricated sales. Dong Dengxin of the Wuhan University of Science and Technology's Finance and Securities Institute told the news outlet that in addition to delisting, the company may face a class-action lawsuit filed by shareholders. The result of that lawsuit could even go as far as bankruptcy.

In addition to civil compensation, Dong said the company could also be saddled with criminal and administrative fines. Further, the employees found to have fabricated the sales could even go to prison. Luckin Coffee said last week it had suspended the employees that were involved.

For now, it definitely looks like trading on Luckin Coffee stock has been halted, but it's unclear why. However, Ucar, of which Luckin Chairman Lu is the biggest shareholder, has also halted trading of its stock. According to Reuters (via Yahoo! Finance), Chinese regulators questioned Ucar about how the fraud allegations against Luckin Coffee would affect it. Ucar officials decided to halt trading in their stock to avoid abnormal price fluctuations.