Has Luckin Inc. Violated Chinese Criminal Law?

(By Zhao Sen)There is a widespread concern about the news that Luckin Coffee, a famous Chinese company listed on the US stock market underwent an over 80% slump in share price because of the allegation of financial information falsification. According to documents provided by Luckin Coffee to SEC, Tencent Securities reported, CEO of Luckin Coffee and some of employees who reported to him did improper activities, including false deals since the second quarter of 2019. According to the US Securities Law 1934 and the Sarbanes-Oxley Act, in addition to a large sum of fines, a person who has committed securities related fraud may face an imprisonment of up to 25 years. Is falsification by Luckin Coffee a crime in Chinese law? This is a good question.

The new amended Securities Law of the People’s Republic of China which was published in 2019 and brought into action on 1 March this year states that this law applies when deciding legal responsibility for activities of issuing and dealing with securities outside the People’s Republic of China that disturb the market order in the People’s Republic of China and harm legal rights of investors in China.

It is the first law that gives CSRC and Chinese legal authorities “long arm jurisdiction” over activities on the securities market in a foreign country.

Therefore, CSRC and legal authorities have the power to hold Luckin Coffee liable for its activities of issuing or dealing with securities outside China that disturb the Chinese market order or harm legal rights of investors in China after the new Securities Law took effect.

Does CSRC have the “long arm jurisdiction” over Luckin Coffee?

First, Luckin Coffee went listed in the US in May 2019. CSRC and Chinese legal authorities have no jurisdiction over its falsification which is activities of issuing securities included in the new Securities Law, which did not take effect at that time.

Second, reported activities of falsification by Luckin Coffee are done mainly by falsifying revenue and exaggerating advertising fees. Whether they could be seen as activities of dealing with securities is questionable.

Finally, if its falsification could be deemed as activities of dealing with securities that continue after the new Securities Law took effect, the Chinese Securities Commission has jurisdiction over Luckin Coffee, but the long arm jurisdiction is only an administrative act.

Has Luckin Inc. violated Chinese criminal law?

It is believed that CSRC and Chinese legal authorities can hold Luckin Inc. liable for its financial information falsification by criminal law. According to Article 161 of the Criminal Law of the PRC, if a company or business falsifies or conceals important financial information that it is legally liable for disclosing to its shareholders and the general public or fails to disclose other important information as required by law, causing serious damage to its shareholders or other people, managers and other people who are directly responsible for it will be sentenced or detained for three years or less with fines in an amount between 20,000 and 200,000 RMB. According to Article 6.1 of the Regulations (II) on Criminal Case Filing and Prosecution Criteria for Public Security Authorities, if a company or business falsifies or conceals important financial information that it is legally liable for disclosing to its shareholders and the general public or fails to disclose other important information as required by law, causing direct economic losses added up to 500,000 RMB or more to its shareholders or creditors or other people, the relevant public security authority should go through the case filing process and prosecute.

Luckin Coffee did not mention in its financial reports for the third quarter 2019 which were published on 13 November 2019 and concealed the alleged falsification by its CEO and his subordinates which was a significant event. If such falsification causes direct economic losses added up to 500,000 or more to shareholders, creditors or other people in China, the CEO and other staff members involved should be found guilty of the crime of violating rules and failing to disclose important information.

We do not completely agree with the above opinions. The Chinese Criminal Law applies to people who are bound by disclosure obligations in Chinese laws, not including US listed companies such as Luckin Coffee who should act in accordance with US laws, are not bound by disclosure obligations in Chinese laws and cannot be published in accordance with the Chinese Criminal Law.

According to Article 7 of the Criminal Law, some people believe, the law applies to PRC citizens who committed a crime in a foreign country, but they could be absolved from responsibility for the crime if they should be sentenced for no more than three years according to this law. The CEO of Luckin Inc. and the persons who reported to him should be liable for the crime according to Article 161 of the Criminal Law.

The above provisions apply to criminals as natural persons, not including organizations. Article 161 of the Criminal Law applies to criminals as organizations, not including natural persons, and the natural persons were punished according to the double-punishment policy. Therefore, the CEO of Luckin Inc. and his subordinates are not persons who should be punished.

With no clear related provision in the Criminal Law and no effective provisions that connect the new Securities Law and the Criminal Law, no person should take criminal responsibility for such activities according to the rule that no person could be found guilty or punished for a crime unless they violate criminal law. Amendments to the current criminal law or new legal interpretations by relevant authorities are needed to give criminal punishment for the above activities.

Based on the above, we believe that Luckin Inc. may take civil and no criminal responsibility for its falsification for the moment.

There is a minor possibility that Luckin Coffee Inc. be found guilty of the crime of fraud in the Chinese Criminal Law if CSRC confirms that Luckin Coffee Inc. has cheated investors by falsification with the intention of illegal occupation since its establishment.

Yesterday afternoon CSRC expressed great concern about and strong criticism for the financial information falsification by Luckin Coffee Inc. All listed companies should strictly comply with related laws and rules and fulfill their disclosure obligations truly, accurately and completely no matter where they are listed. CSRC will verify related facts according to relevant laws and arrangements for international cooperation in securities regulation and supervision, be determined to fight against securities fraud and give good protection of investor rights.

We will wait and see.

 

Lawyer Contacts

Zhao Sen

86-21-52132040

zhaosen@debund.com

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