Car Inc. Chairman Resigns as Luckin Scandal Escalates

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The head of Luckin Coffee Inc. resigned as chairman of Car Inc., as scrutiny over the high-flying Chinese coffee chain and its accounting scandal continues to mount. Shares of the car-rental company surged.

Lu Zhengyao resigned as chairman and non-executive director of China’s biggest rental-car fleet operator to devote more time to fulfill his commitments with parent UCAR Inc. and other businesses, according to a statement to the Hong Kong stock exchange Wednesday.

The development comes after business news outlet Caixin reported Chinese regulators have obtained emails purporting to show Lu instructed financial fraud, citing unidentified people close to the agencies. Regulators found evidence of fraud at Luckin in their investigation, Caixin cited several people as saying.

A company spokeswoman previously declined to comment on the report. Car Inc. shares rose 10% in Hong Kong.

Luckin, the fast-growing domestic rival of Starbucks Corp. in China, is under investigation by both the U.S. Securities and Exchange Commission and regulators at home. Listed on the Nasdaq, its stock has been sold off since resuming trade in the wake of the scandal.

Read more: Luckin Coffee Still Expanding Full Steam Despite Sales Scandal

Lu controls UCAR and remains the chairman of Luckin. Car Inc. said last week that UCAR is selling a stake to state-backed automaker Beijing Automotive Group Co.

Luckin is trading at a fraction of its former value after announcing investigations into fraudulent transactions representing a significant portion of its revenue. The Wall Street Journal reported last month that Luckin inflated its sales by selling vouchers to companies that were tied to Lu, its controlling shareholder.

Car Inc.’s dollar bonds due 2022 were down about 1 cent to 67 cents on the dollar on Wednesday, set for the biggest decline in three weeks, according to Bloomberg-compiled prices.

The company said that under the terms of facilities, if Lu ceases to be a director of the company, certain lenders may declare loans of about $168 million immediately due and payable. Car Inc. has not received any demand from lenders for immediate repayment and it is in the process of obtaining waivers, it said the filing.

Independent research firm Lucror Analytics has a negative credit bias on the company as it expects further operational deterioration amid the pandemic, and also due to concerns over Car Inc.’s corporate governance.

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