Category: Public Companies, Accounting, and Auditing

Last week, on December 16, 2020, Chinese-based coffee chain Luckin Coffee Inc. (“Luckin”) agreed to a $180 million settlement with the United States Securities and Exchange Commission (“SEC”). Luckin’s American Depositary Shares traded on the Nasdaq until July 13, 2020. The settlement stems from allegations that Luckin defrauded investors by materially misstating revenues, expenses, and net operating losses. The SEC’s complaint alleges that these fraudulent accounting actions were taken in an attempt by Luckin to increase profitability and meet earnings estimates.

The case is a reminder of risks associated with investing in U.S. listed companies with Chinese operations, which the SEC flagged in a June 2011 bulletin and a December 2018 cautionary public statement. The case follows a number of SEC enforcement proceedings brought in 2011-2012 featuring trading halts or delistings of at least 50 companies in those years.

Continue reading “The $180 Million Chinese Coffee Case for Attempting to Manage Earnings”

The SEC’s Division of Enforcement issued its annual report on November 2, 2020. According to the report, fiscal year 2020 saw the SEC file a total of 715 enforcement actions, representing a whopping 17% drop from the 862 enforcement actions it brought during the 2019 fiscal year. Indeed, the FY 2020 figure was the lowest in the past six years.  The number of SEC enforcement actions filed against public companies (61) declined to a six-year low, representing the lowest number since 2014.

Continue reading “The Pandemic Has Caused the Number of SEC Enforcement Actions to Decline Sharply in FY 2020”

The number of public company and accounting fraud cases filed under SEC Chair Jay Clayton has declined. The SEC, however, continues to selectively pursue these types of cases. In the latest example, in aggressive parallel actions, on October 8, 2020, the SEC filed charges against SAExploration Holdings, Inc. (“SAE”) and four of its former executives – CEO and Chairman Jeffrey Hastings, CFO and General Counsel Brent Whiteley, CEO and COO Brian Beatty, and VP of Operations Michael Scott – with an accounting fraud that inflated company revenues and concealed the true nature of the relationship between SAE and one of its large customers.

In February 2020, SAE issued restated financial statements reaching as far back as 2014 which, among other things, corrected a $100 million overstatement of revenue and resulted in a $35 million reduction in the value of the company’s assets.  Perhaps unsurprisingly, in August 2002, SAE filed a voluntary Chapter 11 bankruptcy petition in the Southern District of Texas.

Continue reading “Aggressive SEC and DOJ Parallel Charges for Accounting Fraud”

On September 25, 2020, the SEC filed a civil injunctive action against a microcap company, Arrayit Corp., and its President and Chief Science Officer for falsely stating in March-April 2020 that Arrayit had developed a COVID-19 blood test when it had not yet purchased materials to make a test. The SEC further alleged that the test had been submitted for emergency approval, and falsely boasted to investors that there was a high demand for the test.

Continue reading “SEC Continues to Prioritize COVID Fraud Cases”