The giant video screen on the Nasdaq stock exchange in New York's Times Square is decorated for the Luckin Coffee initial public offering on Friday, May 17, 2019. Photo: IC Photo

Luckin Coffee Inc.’s shares sank more than 75% Thursday after the Chinese coffee chain disclosed that its chief operating officer inflated 2019 sales by about 2.2 billion yuan ($310 million).

In a filing with the U.S. Securities and Exchange Commission, the company’s board said it initiated an investigation into the activities of its former chief operating officer and director Liu Jian. Expenses are also believed to have been inflated from the second to the fourth quarter of 2019, the startup said.

Luckin Coffee said Liu and four employees who reported to him engaged in misconduct and have been suspended. The company also said it will take legal action against those responsible.

The company said the investigation is in the preliminary stages, and it is still assessing the financial impact. As a result, investors should not rely upon the company’s previous financial statements for the second and third quarters of 2019, including guidance for the fourth quarter.

In a letter to employees Thursday, the office of Luckin’s president said the incident will cause the company to have deep reflection and adjustment through optimizing governance, strengthening corporate values and organizational restructuring.

Luckin reported 479 million yuan of revenue in the first quarter of 2019, 909 million yuan in the second and 1.54 billion yuan in the third quarter. It forecasted fourth-quarter revenue of between 2.1 billion yuan and 2.2 billion yuan. By that measure, the fabricated transactions accounted for nearly half of the company’s total revenue from the second to the fourth quarters.

The coffee chain’s sales figures were questioned in January when short-seller Muddy Waters Research said it decided to short Luckin’s stock after receiving an 89-page anonymous report accusing the company of fabricating its financial figures.

The unattributed report posted on Twitter claimed that the number of items sold per Luckin store per day was inflated by at least 69% in the third quarter of 2019 and 88% in the fourth quarter, based on 11,260 hours of store video that the report’s authors said they viewed.

Luckin at the time immediately denied all fraud allegations, saying that the methodology of the anonymous report was flawed, the evidence unsubstantiated, and the allegations merely “unsupported speculation and malicious interpretations of events.”

Luckin’s stock was already under pressure even before the fraud allegations as the coronavirus pandemic forced the coffee chain to temporarily shut down many of its stores in China.

The fastest-growing coffee brand in the world dazzled venture capital investors with its dizzyingly rapid growth. Though founded only two and a half years ago, the company quickly expanded in China and now has roughly 4,500 locations, outnumbering its American rival Starbucks by roughly 200 locations, according to research firm Thinknum Alternative Data.

Luckin listed its stock on Nasdaq last May, raising $561 million at $17 a share in one of the biggest U.S. flotations by a Chinese company last year. The shares climbed as high as $50 in January before the fraud allegations. In Thursday’s afternoon trading, the stock plunged 76% to $6.27.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)