Shares in Luckin Coffee have slumped after the company said one of its top executives and other employees had faked sales figures.
The Chinese coffee chain has now suspended its chief operating officer Jian Liu and staff reporting to him.
It comes after the company appointed a special committee to investigate issues in its financial statements for 2019.
Luckin, which competes with Starbucks, had been one of China’s few successful US stock market listings last year.
The Nasdaq-listed company said its investigation had found that fabricated sales from the second quarter of last year to the fourth quarter amounted to about 2.2bn yuan ($310m; £250m). That equates to about 40% of its estimated annual sales.
It also said that it still needed to investigate and verify other costs and expenses that were substantially inflated during the same period.
At the same time Luckin warned investors that they should no longer rely on its previous financial statements that had showed the company’s rapid growth.
The company had 3,680 stores as of the end of September, according to its third quarter 2019 earnings release. That represents an almost six-fold increase since June 2018.
Did Luckin’s sky-high ambitions cause its current problems?
Luckin has been open about wanting to take on the likes of Starbucks and other big coffee chains. The trouble is that, once you make such a declaration, for many that can become the standard you are measured by and have an impact on the buying and selling of shares.
For some time, critics have questioned the financial data coming out of Luckin, especially in terms of how much revenue could be raised from the volume of coffee it sells.
That’s because the proportion of coffee sold at its advertised price is thought to be small.
Luckin offers sales discounts so regularly (like pretty much every day) that many customers have claimed on social media that they have never paid full-price for one of their coffees.
In one way that doesn’t matter. If you’re selling your coffee for more than it costs to make it there’s profit to be made.
However, Luckin has set the bar higher than that by saying it would swamp Starbucks in China and maybe it’s this self-applied pressure which has steered it into these rough seas.
Luckin’s US stock market value had almost tripled since its debut in New York in May, topping $50 a share earlier this year.
Mr Liu has been Luckin’s chief operating officer since May 2018.
In recent months though investors had begun to become wary that there may be some serious issues at the company after an anonymous report alleging that it had made up some of its numbers.
Earlier this year the high-profile short-seller Muddy Waters Research started betting against the company’s shares, citing a report that alleged that Luckin had fabricated financial and operating figures from the third quarter of last year.
At the time, Luckin strongly denied the allegations, describing them as “misleading and false”.
Luckin’s shares ended Thursday’s trading session down by more than 75% at $6.40 after hitting a record low of $4.90 earlier in the day.