"China News Weekly" reporter / He Bin

  Published in the 955th issue of China News Weekly on 2020.7.13

  At 3 pm on July 5th, Ruixing Coffee Beijing General Office at 118 Zhongguancun East Road, Haidian District, Beijing has gathered a lot of media. Since the temporary general meeting of shareholders was not open to the media on that day, Ruixing strengthened security and had to enter the building from the south gate with a work card or related credentials. This is also where the headquarters of UCAR is located. Ruixing Coffee Shop No. 0001 is located on the first floor of this building and was not open to the public that day.

  It was not until that evening that unofficial news came out one after another, saying that all the proposals in the previous general meeting announcement were voted through, that is, the removal of the four directors Lu Zhengyao, Li Hui, Liu Erhai and Sean Shao (邵孝恒), and the addition of Ying Zeng and Jie Yang (杨杰) two independent directors. However, as of press time, the official website of Ruixing and the website of the US Securities and Exchange Commission (SEC) have not officially announced the news of the extraordinary shareholders' meeting. This lag is unusual for a listed company.

  According to the news of all parties, at the shareholders' meeting on the same day, Lu Zhengyao, who was the convener, was present, while Li Hui of Dazheng Capital and Liu Erhai of Joy Capital were commissioned by lawyers.

  According to Tencent News's "Perception" report on the resumption of the meeting, the day's meeting had a fierce debate on the voting rights of 13125 million Class B common shares held by Primus Investment Funds, a company under Lu Zhengyao's name. According to the disclosure of Ruixing Coffee's prospectus, Class B ordinary shares have super voting power, which is 10 times the voting power of Class A shares. However, on June 16, the Cayman court has ruled that the bankruptcy and liquidation of Primus will be held by the liquidator. On the same day, the liquidator also participated as a class B shareholder, but was questioned by Lu Zhengyao in the voting process. , Requiring conversion to Class A common stock.

  On this issue, the two sides were stalemate. Lu Zhengyao rejected the objections as the chairman of the conference, and finally controlled 45% of the voting rights. What is even more surprising is that the voting and counting process did not publicly vote on the spot. "The entire shareholders' meeting procedure is obviously not in compliance. Can the resolution be effective even if it is passed?" a person from the investor asked back.

  Such a result is obviously the last thing an external investor wants to see. "China News Weekly" learned in an interview that when Lu Zhengyao proposed to hold an extraordinary general meeting, both Liu Erhai and Li Hui voted against it and still failed to prevent the meeting from being held.

  "If all the resolutions proposed by Lu Zhengyao are passed, it means that all the company's external directors will be removed, and the remaining board members are all Lu Zhengyao's people. After delisting, Ruixing does not need to publish financial reports, wouldn't it be a dark box operation?" The aforementioned person from the investor said to China News Weekly.

  According to the current voting results, the number of Ruixing's board of directors has been reduced from 8 to 6, namely Guo Jinyi, Cao Wenbao, Wai Yuen Chong (Zhuang Weiyuan), Wu Gang, Ying Zeng, and Yang Jie, of which Ruixing senior vice president Cao Wenbao and deputy President Wu Gang joined after former CEO Qian Zhiya and former COO Liu Jian were removed from the board of directors. Two independent directors Ying Zeng and Yang Jie were nominated by Lu Zhengyao. From the outside view, today's Ruixing Board of Directors has 5 people who are Lu Zhengyao's "persons".

  What worries the aforementioned investors is that Shao Xiaoheng is the person in charge of the special committee. This time he was dismissed and the internal investigation will not continue. The aforementioned investor believes that according to the requirements of the SEC, if there is a problem with the listed company, the company will first conduct an internal self-examination. If the SEC believes that the company does not have the ability to self-examine, it will intervene in the investigation. Once it reaches that point, it is very important for the enterprise Adverse.

  "Do you think the internal investigation is meaningful for financial fraud such as Ruixing?" Li Ruoshan, the academic director of the master's degree program in accounting at the School of Management at Fudan University, asked back. In his opinion, the biggest problem with the investigation initiated by the enterprise is Lack of independence, therefore, the results of the investigation can only be used by the supervisory authorities for reference, and cannot be trusted or used as a basis for punishment.

Investigating suspicious cloud

  Since the muddy water research published an anonymous person's short report on Ruixing Coffee on February 1, Ruixing has been investigated from multiple sources. The first is from Ernst & Young Hua Ming CPAs. In fact, before the Spring Festival this year, Ernst & Young began to conduct on-site audits of Ruixing Coffee’s 2019 annual financial statements, noting that Ruixing Coffee has added a large number of B-ends since the second quarter of 2019. Big customer.

  The business model of Ruixing Coffee suddenly changed from 2C to 2B, which caused the concern and suspicion of the Ernst & Young audit team. So it appointed an anti-fraud forensic accounting team composed of more than a dozen people to intervene and found that Ruixing Coffee was purchased by B-end major customers. The fraud of huge coffee vouchers.

  In mid-to-late March, Ernst & Young Huaming Certified Public Accountants reported the audited company's financial issues to Ruixing's audit committee. Liu Erhai and Shao Xiaoheng, as members of the audit committee, immediately reported to the board of directors. "It can be said that the investigation of Ruixing's fraud was jointly promoted by Liu Erhai and Shao Xiaoheng." said a person close to the board of directors.

  According to the US Securities Exchange Act of 1934, one year after the effective date of the company's IPO registration statement, the audit committee consists of independent directors only. On March 27, Liu Erhai resigned as a member of the audit committee. Later the audit committee was composed of Shao Xiaoheng, Thomas P. Meier, Pu Tianruo, and Wai Yuan Chong (庄伟元).

  According to the announcement issued by Ruixing on April 2, Ruixing established a special committee composed of three independent directors: Shao Xiaoheng, Pu Tianruo and Zhuang Weiyuan, and hired independent legal advisers and legal accountants. With the assistance of professional consulting agency FTI Consulting, Start an internal investigation of Ruixing.

  With the authorization of the board of directors, the special committee can consult the company's documents, records and information, and interview any employees, officers and directors as the special committee deems appropriate. According to the results announced on July 1, the Special Committee and its consultants reviewed more than 550,000 documents collected from more than 60 custodians, interviewed more than 60 witnesses, and conducted extensive forensic accounting and data. analysis test.

  The Special Committee found that Ruixing started to fabricate transactions in April 2019. Therefore, the company's net income in 2019 increased by about 2.12 billion yuan, of which 250 million yuan in the second quarter and 700 million yuan in the third quarter. In 2019, the cost of the company increased by 1.34 billion yuan, of which 150 million yuan in the second quarter, 520 million yuan in the third quarter, and 670 million yuan in the fourth quarter.

  Evidence shows that the company's former CEO Qian Zhiya, former COO Liu Jian, and some employees participated in fabricated transactions, and funds supporting forged transactions flowed into the company's related parties through some channels. According to the Wall Street Journal, Ruixing's fraud model is to add a large number of corporate customers, and some companies' business information shows that they are related to the "China Department".

  However, the progress of the internal investigation was extremely difficult. A person close to the board of directors said that Lu Zhengyao did not cooperate, "no computer, no mobile phone, and no in-depth interview." Therefore, in the announcement on July 1, the special committee "based on The documents and other evidence identified in the internal investigation, as well as an assessment of the degree of cooperation of Mr. Lu Zhengyao in the internal investigation, made recommendations regarding Mr. Lu Zhengyao." According to this proposal, the board of directors proposed to convene a board meeting on July 2 to remove the chairman of Lu Zhengyao. However, of the 7 votes in effect, only 4 were in favor, not reaching the 2/3 ratio. Lu Zhengyao was not recalled that day.

  "The authority of the Special Committee determines that they cannot get the real hammer that Lu Zhengyao knows about or even participates in financial fraud. But the internal investigation is a professional consulting agency. The report can be said to be careful. Where they think there is no problem, the name cannot be Appeared in the report." The aforementioned person close to the board said.

  At the same time that Ruixing held an internal investigation, the China Securities Regulatory Commission, the Ministry of Finance and the General Administration of Market Supervision all stationed in Ruixing and launched an investigation against Ruixing's financial fraud. The three major regulatory agencies with law enforcement powers obviously have an advantage in investigations. It is understood that the Ministry of Finance sent Xiamen Supervision Bureau and Beijing Supervision Bureau to settle in Ruixing to carry out an investigation. A person involved in on-site supervision recalled to China News Weekly that the on-site investigation mainly focused on financial fraud, and Ruixing cooperated more The new CEO has arrived on the scene many times and interviewed many relevant personnel. In terms of division of labor, the Beijing Bureau and Xiamen Bureau are mainly responsible for the investigation of specific functional departments, while the investigation of senior executives is the responsibility of the Supervision and Evaluation Bureau of the Ministry of Finance.

  As early as mid-June, a person close to financial supervision revealed that the on-site investigation had ended and a report was being formed. Just before the "China News Weekly" was published, the latest news was that the report has been completed and is waiting for the leadership's approval. "Current reports on the Internet are untrue." The person close to the regulator said, but it was not clear which report was untrue. In the previous report about the investigation of Ruixing by the Ministry of Finance, in addition to information about the progress of the investigation, the most sensational news was that the Ministry of Finance found from Lu Zhengyao's internal emails that it had found instructions for counterfeiting.

  According to the aforementioned supervisors who participated in the investigation, all previous accounting supervision investigations that violated the criminal law will be transferred to the judicial organ. If it is only a violation of the accounting law, the financial department has the right to punish. According to Chinese accounting law, the penalty for financial fraud is generally 3 years.

"Werewolf Kills"

  Ever since the muddy water was exposed for short in February, all parties at Ruixing have been intriguing.

  Ruixing's board of directors conducted rumours at the first time, denying the content of the report in the muddy water short report. However, Ernst & Young, an accounting firm as a "gatekeeper", did not help conceal, but a month later, it warned Ruixing's audit committee. The start time of fraud is also determined to be the second quarter of 2019. At that time, Lucky IPO audit has been completed. Otherwise, Ernst & Young and Ruixing will face more than financial fraud, or will be a more serious securities fraud issue.

  At that time, Ruixing's fourth quarter 2019 financial report has not yet been announced, but from the second and third quarter 2019 financial reports, operating data can be described as leaps and bounds. The total net product revenue was RMB 870 million (US$126.7 million), an increase of 698.4% from RMB 109 million in the same period in 2018. The cumulative number of trading customers increased from 2.9 million at the end of the second quarter of 2018 to 22.8 million. In the second quarter alone, the company added 5.9 million trading customers. The average monthly trading customers in the quarter were 6.2 million, an increase of 410.6% from the 1.2 million in the second quarter of 2018. The average monthly total sales were 27.6 million units, an increase of 589.7% from the 4 million units in the second quarter of 2018.

  "We are satisfied with our business performance because we continue to implement our long-term growth plan." For this round of surge, Rui Xing's former CEO Qian Zhiya explained that the total net income from sales of products increased by 698.4% year-on-year, due to A significant increase in trading customers, an increase in the average amount of goods purchased by trading customers and an increase in effective sales prices.

  Huang Shizhong, president of Xiamen National Accounting Institute, believes that Ernst & Young, as an accounting firm, is mainly responsible for annual audits. Currently, the annual report for 2019 has been audited, but no audit report has been issued, so there is no need to be responsible for the fraud in 2019. As long as it proves that the financial statements used for the IPO application are free of financial fraud, that is, the reports from the establishment of Ruixing Coffee in October 2017 to December 31, 2018, there are no misstatements, Ernst & Young, who provides the audit, is not liable.

  Not only is there no responsibility, in Huang Shizhong's view, unlike the indirect and speculative evidence held by the muddy water through external adjustment, Ernst & Young as the auditor of Ruixing Coffee can access the internal information of Ruixing Coffee to obtain irrefutable evidence, In the end, the management of Ruixing Coffee had no choice but to admit fraud. "In exposing financial fraud, Ernst & Young can be said to have contributed."

  After the discovery of fraud, external directors and independent directors were particularly active in launching internal investigations. In Ruixing's board structure, independent directors are mainly in the audit committee, which is the main force to carry out internal investigations. On the one hand, outside directors should preserve the value of the equity held and avoid economic losses. On the other hand, it is necessary to clarify their responsibilities and avoid criminal punishment.

  This is also recognized by the aforementioned investors. Generally speaking, in the investment community, investors can lose a project, but they cannot lose credibility, lose money, or make up for other projects. However, if they are determined to participate in fraud, they will lose the trust of the limited partner (LP) behind them.

  Under this logic, Ruixing’s board of directors was surging, and even if it had already been declared delisted, the board’s war was still burning.

  Combing public information, we can see that Li Hui of Dazheng Capital and Liu Erhai of Yuyue Capital have known Lu Zhengyao for many years and have invested in several projects of the latter. Therefore, the outside world has always called the cooperation of the three people the “iron triangle”. However, this statement was denied by the aforementioned investors, saying that the previous investment was just normal venture capital, and that Lu Zhengyao's project was more important than this person.

  It is understood that in the investment in Ruixing, Joy Capital has invested about 120 million US dollars, and has not yet sold a share. And Dazheng Capital once reduced its holdings of 28.4 million shares on January 8, cashing out 230 million yuan, and the shareholding ratio dropped from 14.06% to 12.15%. According to Dazheng Capital's disclosure at the time, it had recovered its previous investment in Ruixing Capital after the reduction.

  "Although Dazheng did not lose much in terms of investment, the reduction of shareholding occurred shortly before the muddy water short report. At that time, many people believed that Dazheng had insider trading, which was unfavorable for a venture capital (VC) institution. It will even lose the trust of LP." The aforementioned investor said.

  The bigger crisis comes from doubts about whether to participate in fraud. With the deepening of internal investigations, the personnel of Ruixing's board of directors has been continuously adjusted. First, Qian Zhiya and Liu Jian were removed from their posts. Then, the two independent directors resigned one after another. Outside directors and independent directors initiated a board meeting, proposed to remove Chairman Lu Zhengyao, and rushed to produce the investigation report the day before the board of directors, but it was still not approved. Until the extraordinary shareholders' meeting on July 5, Lu Zhengyao was dismissed as his At the cost, the other three directors were dismissed.

  Fortunately, Luckin, who was squandered in the counterfeiting crisis, was asked by NASDAQ to withdraw from the market twice because he failed to disclose the annual report in time, and finally decided to hold a hearing on June 25. However, just one day before the hearing, Ruixing notified the cancellation of the hearing and announced the decision two days later. At the same time, Lu Zhengyao initiated an extraordinary general meeting to propose the removal of the four board members including Shao Xiaoheng. This move made Ruixing Delisting becomes a foregone conclusion.

  On June 26, Eastern Time, Ruixing plunged as soon as it opened, triggering six meltdowns, and the final closing price was fixed at $1.38, which is a 91.88% decrease from the listing price of $17 at the time of listing, compared with the highest point in history. It has shrunk by 97.31%.

  It is reported that even after delisting, Ruixing still has billions of funds on its books. "You will be able to make a profit!" The aforementioned investors really don't understand why it is fraudulent, and this issue has The silence has become a puzzle.

Where to go

  Ruixing Coffee adopts a variable interest entity (VIE) structure, operates in China, and is listed in the United States, which determines that it must be regulated by both China and the United States. At present, the SEC has not launched an investigation of Ruixing, and Chinese regulators have not announced the results of the investigation. Now, where does the board of directors controlled by insiders take the "Little Blue Cup"?

  After the delisting, Ruixing will return to the pink sheet market for over-the-counter transactions. It is not subject to the supervision of the US securities regulatory authority, and there is no financial and information disclosure requirement, as long as the quotes of listed companies are published at the end of each day. In China, more than 4,000 stores and more than 30,000 employees still maintain daily operations. For consumers, the cost-effectiveness of the subsidy model still seems attractive compared to financial fraud.

  However, according to the existing laws of China and the United States, it is not yet known whether the listed companies are financially falsified or face huge fines. What can be seen is that since Ruixing has closed many stores since falling into the whirlwind of counterfeiting, it has maintained a relatively stable operation regardless of the passenger flow of a single store or the volume of orders.

  Prior to the SEC's investigation, some investors and creditors have begun to use legal means to protect their rights and initiate litigation against Ruixing. Transnational litigation expert and director of Beijing Hao Junbo Law Firm Hao Junbo has represented several investors in securities litigation against Ruixing Coffee. He introduced to "China News Weekly" that, according to the logic of US stocks, in the case of multiple investors litigating a listed company, a chief plaintiff will generally be identified to take the next step on behalf of the investor. At present, the US court is choosing the chief plaintiff. He is responsible for acting, and there are already several investors from multiple countries. Hao Junbo expects his agent to become the chief plaintiff in this case.

  "This is a civil claim litigation, which is the investment loss claimed by the investor. The general result is that the listed company compensates the investor for the investment loss. Whether the delisting does not affect its compensation obligation." Hao Junbo believes that Ruixing, as a listed company, Because the false statement caused the company's stock price to fall, causing investors to suffer losses, and the delisting made it difficult for Ruixing to raise funds from the US stock market, and lost a very important financing channel. This is a great deal of damage and has an obligation to compensate investors financially.

  However, due to the real-time changes in stock prices, there is no need to clarify the amount of the claim when prosecuting, and then calculate based on the loss. Moreover, such cases are generally settled through mediation, and the amount of compensation can be accepted after negotiation between both parties.

  From the company level, it is mainly civil compensation for investors, and as a director executive, if he participates in fraud and fraud, he must also bear corresponding criminal responsibility, up to 25 years in prison.

  In addition to investor claims, Luckin's major shareholder Lu Zhengyao also faces huge debts. According to Ruixing's prospectus, Lu Zhengyao's family is Ruixing's largest shareholder, holding Ruixing shares through two entity companies under the Lu Zhengyao family trust fund, of which the registered place is 2.97 in Haode Company in the British Virgin Islands 100 million Class B common shares, Primus, whose registered place is in the Cayman Islands, holds 188 million Class B common shares.

  Just in January of this year, Ruixing Coffee completed a round of additional issuance. The investment banks underwritten include Credit Suisse, Morgan Stanley, CICC Hong Kong and Haitong International. Among them, Credit Suisse alone underwritten 8.28 million depositary receipts. According to the prospectus document issued by Ruixing Coffee on January 8, Lu Zhengyao, Qian Zhiya and Lu Zhengyao’s sister Sunying Wong, the three of them hold a total of 994 million shares of Ruixing Coffee, but accumulatively pledged 488 million shares, the proportion of pledge Up to 49.13%.

  At that time, Ruixing had a smooth wind in the capital market, and the stock price once reached a maximum of US$51.38. However, on April 2nd, after Rui Xing exposed its fraud, the stock price plunged sharply. On the next day, Credit Suisse issued mandatory advance to Rui Xing on behalf of its Hong Kong branch, Goldman Sachs, Barclays, CICC Hong Kong, Haitong International and Morgan Stanley. Notice of repayment.

  According to a report released by Goldman Sachs on April 6, a total of 515 million shares of Class B common stock and 95.445 million shares of Class A common stock were pledged, including an additional entity controlled by the family trust of Rui Xing Coffee CEO Qian Zhiya Pledged shares. The loan arrangement has full recourse against Lu Zhengyao and his spouse.

  In two months, Credit Suisse and Goldman Sachs sold part of their pledged equity and raised about US$210 million, but Ruixing still faced a debt gap of US$300 million.

  On June 16, the Cayman Court has issued a judgment in support of the bank’s bankruptcy liquidation of 188 million shares of Ruixing stock held by Primus Company under Lu Zhengyao and 197 million shares held by Mayer Company under Lu Zhengyao’s sister.

  On July 6, local time, the British Virgin Court is about to pronounce a verdict. Once the court supports the liquidation of 297 million shares of Luckin held by Haode Company under Lu Zhengyao and 313 million Class B common shares held by Summer Company under Qian Zhiya, Lu Zhengyao will not Then there is the majority shareholder of Ruixing. But after the previous day's general meeting of shareholders, Lu Zhengyao has firmly held the board of directors in his hands.

  According to Li Ruoshan, the probability that Ruixing domestic companies can maintain healthy development in the future is almost zero. It is difficult for a company with financial fraud to retain its original state, and unless it is acquired, it is difficult to maintain The original organizational structure. According to the data from Tianyan, the coffee machines in many stores of Ruixing are currently under pledge.

  "That is to say, the ending of the enterprise is certain, and the greater uncertainty lies in the level of accountability for Ruixing and the relevant responsible persons." Li Ruoshan said that after the Enron company broke the financial scandal In the United States, the Sarbanes-Oxley Act was amended. According to the Act, if a listed company fails to establish a sound internal control system, the company will be held accountable from the CFO to the chairman if problems arise. That is to say, in the event of financial fraud, executives are unaware, indicating that the internal control system is imperfect. According to the Sarbanes-Oxley Act, company executives will be punished. If you know, you are involved in financial fraud, which is more serious and can be sentenced to a maximum of 25 years in prison.

  Many people familiar with U.S. stocks analyzed that the investigation and supervision of the United States and China are independent of each other. Even if the United States already bears criminal responsibility, if it finds a problem in China, it will still be punished. It is more likely that after Ruixing Coffee was delisted from the market, the management and management personnel were returned to the country. Even if the US court judged, the execution efficiency may not be guaranteed.

  In Ruixing's prospectus, there was a hint about this: "We are a Cayman Islands company and all of our assets are basically located outside the United States. Basically all of our business is conducted in China. In addition, our Most directors and executives are nationals and residents of countries other than the United States. These people’s assets are basically located outside the United States. Therefore, if you think your rights are violated by the United States federal securities laws or other laws, you may have difficulty It may not be possible to bring a lawsuit against us or these individuals in the United States. Even if you successfully bring such a lawsuit, the laws of the Cayman Islands and China may prevent you from executing judgments on our assets or the assets of our directors and executives."

  A prophecy!

  "China News Weekly" No. 25, 2020

Statement: The publication of the "China News Weekly" manuscript is subject to written authorization