Chinese beverage chain Luckin coffee shares plummeted 75.6% on Thursday after it disclosed that several employees including its COO had fabricated transactions for much of 2019, amounting to an estimated RMB 2.2 billion in falsified sales.

Why it matters: The disclosure comes two months after doubt about the Chinese Starbucks rival’s operational metrics were first floated in a report made public by short seller Muddy Waters. The scandal marks a stunning fall for the Xiamen-based company that had been touted as the country’s largest coffee chain by store count.

Luckin still hasn’t filed its financial report for the fourth quarter of 2019, though the Q4 earnings season is coming to an end. The upcoming report will be closely scrutinized as an indicator of its real performance.

In addition to Q4 uncertainties, Luckin’s Q1 2020 financials are expected to have suffered from limited business activity due to the Covid-19 outbreak and the extended Spring Festival holiday, like many of its peers.

Details: Luckin announced Thursday that a preliminary internal investigation showed that it reported an estimated RMB 2.2 billion ($310 million) worth of phony sales to investors, from the second to the fourth quarter of 2019.

Certain costs and expenses were also “substantially” inflated during this period, the company said in the statement.

The company said that Liu Jian, Luckin’s chief operating officer and a director of the company along with a number of employees reporting to him had “engaged in misconduct, including fabricating certain transactions.”

It pledged it would take appropriate action, including legal measures, against all individuals responsible. The employees have been suspended as recommended by a special committee formed by three independent board directors.

Share prices for Car Inc., the Hong Kong-listed firm which shares the same funding network and whose executives went on to found Luckin, dived 45.1% Friday.

Meanwhile, stock prices for rival Starbucks closed 3.8% up.

Expert’s take: “There’s a long, painful road ahead [for Luckin],” Michael Norris, leader of research and strategy at AgencyChina, told TechNode on Friday.

“The company will have to release their latest earnings, provide Covid-19 related guidance, endure forensic accounting, and lawsuits,” he said.

However, Norris noted it’s still too early to predict the total downfall of the company. “Even with last night’s sell-off, the company still boasts a [$1.62 billion] market capitalization.”

The Thursday press release estimated the revenue fraud at RMB 2.2 billion but also intimated there were inflated costs, Norris added. “We’ll need to see the full extent of the fraud before determining what Luckin’s burn rate looks like.”

Context: In February, short seller Muddy Waters tweeted an anonymous report which accused Luckin of disclosing fraudulent operational figures and that it is a “fundamentally broken business.” The company’s share sank more than 19%.