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China-Based Coffee Company Settles SEC Charges of Accounting Fraud's picture
Commentary by Steven Lofchie

A China-based coffee company settled SEC charges for materially misstating revenue, expenses and net operating losses in order to give investors the false impression of rapid growth and increased profitability, and to satisfy earnings estimates.

In a Complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that the company created more than $300 million in false retail sales through the use of related parties. The SEC further alleges that the company overstated its revenue by over 27 percent in its June 2019 financial statements, and by over 45 percent in its September 2019 financial statements, and understated its net loss at the same time by 15 percent and 34 percent, respectively.

The SEC charged the company with violations of Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, Section 17(a) of the Securities Act and Exchange Act Rules 10b-5 ("Employment of Manipulative and Deceptive Devices"), 12b-20 ("Additional Information") and 13a-16 ("Reports of Foreign Private Issuers on Form 6-K"). The SEC acknowledged that the company self-reported the accounting issues, cooperated with the SEC's investigation and added internal accounting controls.

To settle the charges, the company agreed to (i) permanent injunctions and (ii) a $180 million civil money penalty. The settlement is subject to court approval.


In light of the scope of the fraud, and the SEC's focus on misconduct by Chinese issuers, it is notable that the SEC very expressly applauded the remedial efforts of the company (see page 15 of the Complaint).

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