|Footnotes for this article are available at the end of this page.
A “pump-and-dump” securities fraud is a type of confidence game. The company is the mechanism used to accomplish the steal. A company with securities traded on public markets must file periodic reports detailing their business and providing information on its financial position and performance. In a pump-and-dump scheme, investors—the so-called marks—trust false financial reports showing exploding operating cash inflows and buy shares of the company in the public market. The buy-in increases demand for ownership, which increases the share price of the company’s stock. This is the “pump.” When the price of ownership doubles or triples, those who are in on the scheme—the “confidence team”—cash out, selling into an inflated market that is unaware of the “con.” This is the “dump.” If and when the “con” is revealed, reported numbers are exposed as fictitious, and the share price rapidly deflates as a sell-off ensues. Investors have been swindled.
This simple model, a common type of fraud that for years has been plaguing investors in (usually) “small-cap” companies in the United States.1 It applies nicely to the securities fraud of Luckin Coffee Inc. (“Luckin” or “Company”),2 a successful pump-and-dump, and the story of Luckin offers an excellent cautionary tale. We discuss some of the lessons to be learned below.
Luckin is a Cayman Islands corporation created in October 2017. It operates coffee shops in China and describes itself as a “pioneer of a technology-driven new retail model to provide coffee and other products of high quality, high affordability, and high convenience to customers.”3 Its business model is mostly online: customers purchase coupons online, order coffee and other products online, and use the coupons to pay online. Customers must, however, travel to the particular Luckin store that prepares the order to retrieve it. In short, Luckin’s model is a composite of Starbucks and Amazon.4
Luckin became a public company on May 17, 2019, through an initial public offering (“IPO”), and began trading on the Nasdaq exchange the same day. The IPO price was $17 per American Depository Share (“ADS” or Share”), which by the opening of trading had risen to $20 per Share, but it quickly soared to $25 before closing at $20.38 on the first day of trading.5
Formal Claims of Fraud
Luckin’s accounting year ends on December 31. On December 16, 2020, just before its first full year as a public company ended, the SEC filed a civil complaint in the U.S. District Court for the Southern District of New York (“Complaint”) alleging that Luckin had engaged in a fraud scheme that began in April 2019, during Luckin’s second quarter, and ended in January 2020, just after its 2019 year had ended.6 The SEC alleged that Luckin created phony retail sales transactions totaling $311 million.7 Although the Complaint names only the corporation and no individual defendants, the SEC asserts that its investigation is ongoing.8
Along with the Complaint, the SEC filed a settlement in which Luckin agreed to pay a civil money penalty of $180 million to the SEC (“Settlement”). The SEC Settlement amount may be offset by Chinese authorities-approved payments to securities holders in Luckin’s ongoing provisional liquidation proceedings in the Grand Cayman Court.9 Luckin’s ability to pay the penalty or survive as a business are not givens.
1Q 2019: The First and Last Audited Financial Statements
In February 2019, Luckin’s auditor issued an Audit Report on the Company’s 2018 financial statements.10 Luckin used these financial statements in connection with its IPO in the U.S.—around the time when the fraud scheme began. On April 22, 2019, Luckin filed its prospectus (Registration Statement on Form F-1) as a foreign private issuer (“FPI”),11 and on May 8, 2019, the Nasdaq Global Select Market approved the Company’s ADSs for listing as “LK.” On May 16, 2019, the SEC issued a Notice of Effectiveness, authorizing Luckin to sell the ADSs in the U.S. markets.
2Q 2019: Let the Scheming Begin
According to the Complaint, Luckin insiders began concocting sales of product in transactions showing both sales and redemptions of coupons. Luckin used three schemes to show sales of coupons.12 Company insiders sold coupons to Luckin employees (“First Scheme”), purported to sell coupons to genuine corporations, which Luckin personnel controlled or with which they were associated (“Second Scheme”), and generated bogus coupon sales in volume through contracts with shell corporations acting as purported coupon resellers (“Third Scheme).” Because sales of coupons generate corresponding liabilities, not revenues, in all three schemes Luckin used bogus online orders and coupon redemptions to show sales of product.
Amounts the three schemes generated in purported coupon sales enabled bogus redemptions (sales of product) totaling $311 million. The Third Scheme accounted for almost 90%, the Second Scheme about 7.5%, and First Scheme about 2.5% of the fictive revenue generated in the last three quarters of 2019 and January 2020: $36 million for the second quarter, $103 million for the third quarter, and $172 million for the fourth quarter.13 As with most financial fraud schemes, Luckin also kept two sets of books: what the SEC Complaint calls the genuine “Business Operations Database” and the fraudulent “Fabricated Database” which combined genuine and bogus sales. Not surprisingly, Luckin’s finance department could only access and print reports from the Fabricated Database.14
2Q 2019: The Initial Public Offering (IPO)
On May 16, 2020, two underwriters in New York City, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC, and two in China (“Underwriters”) sold over 31 million Luckin ADSs, each ADS representing eight of Luckin’s Class A ordinary shares.15 Each share was priced at $2.25, causing an ADS to be priced at $18.00. The Offering brought gross proceeds to Luckin and the Underwriters totaling $645 million.
3Q 2019 and 4Q 2019: Continuing the “Pump”
The SEC does not require a foreign private issuer (“FPI”), such as Luckin, to file auditor-reviewed16 quarterly financial statements on Form 10-Q.17 On August 14, 2019, about three months after the IPO, the Company published its first, post-IPO quarterly results—its maiden earnings—for the second quarter of 2019.18 The Company reported that total net revenue from product sales had increased almost seven-fold (698.4%) over the same results for the second quarter of 2018, to $126.7 million.19 Store-level operating loss decreased to $8.1 million, a drop from the total for the second quarter the prior year.
News of Luckin’s astounding growth continued into the next quarter. On October 7, 2019, Monex Securities noted that Luckin had been opening 200 new stores per month, on average, with a strategic focus on pick-up stores and reducing delivery specialized stores.20 On November 13, 2019, Luckin revealed its third-quarter financial results,21 which showed total net revenues from product sales had increased to almost $209 million, a fivefold (557.6%) increase over the same quarter in 201822 and an increase of $86 million from the previous quarter (67.9%). This raised store-level profits to 12.5% of the net sales revenue, or about $26.1 million, in contrast to a net loss for the same quarter in the prior year.
1Q 2020: The Follow-on Offering and “Dump”
On December 31, 2019, trading in Luckin’s ADSs closed at $39.36, more than double the May 2019 IPO price.23 By January 2020, the confidence individual or team decided it was time to capitalize on the pump—in this case, by raising more capital for Luckin in a follow-on offering—while, most importantly, selling off a huge ownership position in a secondary offering. On January 6, 2020, Luckin registered 72 million new shares, packaged as 9 million new ADSs, for sale to the primary market and 4.8 million ADSs that unidentified inside shareholders could sell into the secondary market.24 The offerings were a success: sales of newly issued and already issued ADSs totaled almost $1.1 billion.25 On January 15, 2020, Luckin announced that it had raised $363.4 million from ADS sales, $388.4 million from sales of notes, and it expected another $110 million in underwriter purchases of the securities.26 The unidentified selling shareholder(s) apparently sold all 4.8 million ADSs at $42 per ADS for a total of $201.6 million.27
1Q 2020: The Discovery
Luckin’s external auditor likely began auditing the Company’s 2019 financial statements around the end of 2019, as calendar-year FPIs are required to file their audited statements in Form 20-F by April 30, 2020.28 In late January or early February 2020, while the audit was ongoing, the public learned that Luckin’s 2019 phenomenal growth might be too good to be true.
In late January 2020, an anonymous source published an 89-page white paper entitled “Luckin Coffee: Fraud + Fundamentally Broken Business” (“Report”), which presented data supporting an argument that, immediately after Luckin’s IPO, “the Company evolved into a fraud by fabricating financial and operating results in 3rd quarter 2019.”29 The Report noted that Luckin “wasted no time to successfully raise another USD 1.1 billion (including secondary placement) in January 2020.”30
The Report generated discussion about Luckin’s possible cooking of the books. On February 1, 2020, Muddy Waters Research stated that the Report likely would cause Luckin’s ADSs to fall, and in early February 2020, short-selling companies jumped on the bandwagon. Luckin’s true operations began to come to light.31
The unraveling of the story is unremarkable. Luckin initially denied claims of fraud, after which it announced, on April 2, 2020, that an internal investigation was underway, resulting in a finding that the chief operating officer had fabricated sales by about $310 million.32 Directors and officers left voluntarily or involuntarily. On April 7, 2020, Nasdaq halted trading in Luckin stock.33 On June 16, 2020, Luckin announced that it would further delay the filing of its annual report on Form F-20, pending the results of its internal investigation,34 and on July 15, 2020, the Grand Court of Grand Cayman, in response to a creditor’s petition, appointed provisional liquidators for Luckin to negotiate and restructure its financial obligations.35
The SEC stepped in and filed its Complaint and Settlement on December 16, 2020. Luckin’s audited financial statements have yet to be filed. The Complaint ignores the Report as the obvious cause of the revelation of the Luckin Fraud: “Luckin’s fraud came to light in early 2020 in the course of the annual external audit of the company’s financial statements.”36 This statement is true—in terms of timing—but it fails to credit those who brought the fraud to public light so soon.37
Within eight months, Luckin raised about $1.7 billion in the U.S. securities markets. The insider(s) who captured $200 million—about 12% of the total—most likely used Luckin as a tool to swindle investors out of their funds. Who was this selling shareholder or who were the selling shareholders? Was it Luckin’s now-former chairman Lu Zhengyao, its chief executive officer Jenny Zhiya Qian, or its chief operating officer Jian Liu, or did two or more of these individuals share in the pot of gold?38 Unless and until the SEC or another enforcement body finds this out and brings the information to light, the actual beneficiaries of the fraudulent scheme will remain unknown and untroubled.
Ponzi schemes are to investment companies what pump-and-dump schemes are to operating companies. They are fraud siblings, if you will, and both have been around for as long as “securities”—promises and paper, now digitized—have been around. As with all investment frauds, investors focus more on securities market activity (volume and price of ownership and debt) and less on the product market activity, which is often much less visible to them. Individual and even institutional investors may assume that: (1) small or medium-sized operating companies with storefronts and employees are unlikely candidates for pump-and-dump schemes; (2) familiar American financial, legal, and accounting firms hired by offshore issuers lessen the risk of investment; and (3) federal securities laws provide the same protections against offshore as onshore fraud schemes. The story of Luckin reveals that these assumptions can be problematic for investors.
Legitimate Fronts May Mask Frauds
Although Luckin has stores and software to conduct its business operations, existing businesses can and are used for the purpose of masking fraud schemes. The business operations provide a veneer of plausibility to the tale of the successful business in which investors should pour funds. In the case of Luckin, the timing of the blatant revenue-recognition (and correlative expense-recognition) scheme was not an “accidental” or “incidental” development; it was planned and executed within a brief but important window that included two public offerings in the United States. Hidden behind the scenes of the apparently successful business, conducted by stores and cafes using online purchases of coupons, lay a gross overstatement of revenues and sales. This reflects a growing pattern by certain offshore fraud operators. Behind an opaque and uncooperative government secrecy regime, tacitly permitted by a government that refuses to cooperate with foreign regulators, Chinese companies have learned the benefits of the offshore pump-and-dump model.
Unfortunately, the pump-and-dump model is portable, and it morphs and improves. The SEC and Department of Justice cracked down on domestic “penny stock” and “microcap” pump-and-dump schemes in the 1980s and 1990s, making the practice much more difficult to pull off with impunity. In reaction, at least in part, to the zealous enforcement efforts in the United States, in the 1990s and early 2000s, the model moved from the U.S. to Canada and its then-laxer regulatory regime and the opportunity to sell into joint U.S. and Canadian markets, on exchanges and over-the-counter. Of note, the U.S. and Canadian “penny stock” or “microcap” versions of the pump-and-dump scheme involved relatively smaller swindles in stolen money.
Over time, Canadian provincial regulators learned to cooperate with U.S. authorities and began to clean up their markets of these undesirable entrepreneurs. The model moved on to China where it was inflated—in total theft amounts—as it had seldom been inflated before.
U.S. Professional Firms Are Not Guarantors of Legitimacy
The Chinese version of the pump-and-dump, of which Luckin is one example, routinely employs well-recognized American-branded investment banks, law firms, and auditors. Engaging these enterprises provides credibility to a company for which overseas monitoring costs would be high. What most individual investors may not realize is that investment banks and professional firms that consult on IPOs are paid out of investors’ funds, raised during the IPO, for limited roles that may neither precede nor post-date the IPO.
The external auditor for Luckin, which was required to exercise professional skepticism regarding the financial statements subject to audit, is not American, even though it carries a familiar American brand name and, as an international audit firm registered with the Public Company Accounting Oversight Board (“PCAOB”), is required to comply with certain professional standards and to provide audit documentation to the PCAOB upon request. Many investors (and many others) do not realize that the familiar U.S.-based audit firms essentially franchise their names to overseas audit firms. The business and other controls imposed on these “franchisees” may be more or less effective, but in the case of China specifically, the SEC and PCAOB have found themselves powerless to compel Chinese auditors—even after years of trying and despite numerous government-to-government demands—to produce their audit work-papers to enable a proper review of audit quality or potential knowledge or involvement in securities frauds perpetrated by Chinese companies. This does not necessarily mean, of course, that any such audits are necessarily impaired or of low quality, but one cannot know. In the case of Luckin, the auditor did not sign off on any audit report after the fraud had come to light, and there is no reason to believe that the audit had not discovered the recognition frauds. It has still not issued an audit report on Luckin’s 2019 year. We suspect that even without the short-seller revelations, the fraud would have eventually come to light after Luckin’s extended delay in filing audited financial statements for 2019.
U.S. Securities Laws May Be Ineffective in Some Countries
The “protections” offered by the SEC and Department of Justice in enforcing securities laws and regulations or of “private attorneys general” in initiating U.S. securities class actions are much less reliable or relevant to certain FPIs, particularly those FPIs with no significant U.S. assets, where the country in which assets are located will not cooperate with U.S. regulators, and where no corresponding local laws apply or are enforced.39 The SEC and other federal agencies cannot as effectively “deter” offshore pump-and-dump schemes as those onshore, and the applicable rules permitting foreign private issuers do not address this inability. Those who steal investors’ funds in these schemes may be less accountable for their criminal conduct when a safe haven such as China acts to shield the evidence of their conduct behind secrecy laws and, in particular, where there is no extradition treaty and no ability to reach the assets of those behind the scheme.
Here, the funds invested by U.S. investors may have gone to accounts held by Luckin in the Cayman Islands, and from there, perhaps, to accounts in Chinese banks for the benefit of Luckin’s principals. Unlike U.S.-based companies, Luckin did not file—and did not have to file—SEC Forms 3, 4, or 5, which reveal insiders’ securities holdings, purchases, and sales. We do not know who gained from Luckin’s pump-and-dump or by exactly how much. Suing a company and seizing what remains of shareholder wealth after the bulk has been transferred elsewhere provides no deterrence with respect to the true beneficiaries of the fraud. The quality of an issuer’s post-theft, “voluntary compliance” with an investigation is difficult to properly assess. In short, investors’ expectations that a foreign company whose securities are listed on U.S. exchanges is subject to the same sort of regulatory enforcement mechanisms and potential liability as other listed companies may be illusory.
The Latin maxim “caveat emptor”— buyer beware—applies to the purchase of any securities, but it applies doubly when purchasing the securities of an entity for which a theft will prove of little consequence to the perpetrators.
 A slightly different variation on the scheme, which used to be common with small-cap pump-and-dumps, is for the company to issue fake news releases touting, for example, some breakthrough product or lucrative new contract and to ride the increase in demand for shares occasioned by the fake publicity to pump up the price and then dumping (selling shares) before the market figures out the news was fake. This variation is less sustainable (because information now moves at the speed of the internet) but easier (because it doesn’t require generating fake financial statements).
 We reconstruct this story using Luckin’s filings with the Securities and Exchange Commission (“SEC”), the SEC’s Complaint, and other documents available online.
 Luckin Coffee Inc., News Release, Luckin Coffee Inc. Announces Full Exercise of Option by the Underwriters to Purchase Additional American Depositary Shares, GlobeNewswire (Jan. 17, 2020), https://www.globenewswire.com/fr/news-release/2020/01/17/1972183/0/en/Luckin-Coffee-Inc-Announces-Full-Exercise-of-Option-by-the-Underwriters-to-Purchase-Additional-American-Depositary-Shares.html.
 Tanner Brown, Opinion: Audacious Chinese coffee chain Luckin, not content with its quixotic battle against Starbucks, dreams of becoming Amazon, too, MarketWatch (Mar. 31, 2020), https://www.marketwatch.com/story/audacious-chinese-coffee-chain-luckin-not-content-in-its-quixotic-battle-against-starbucks-dreams-of-becoming-amazon-like-2020-03-30?mod=article_inline.
 Evie Liu, The Luckin Coffee IPO Is Today. Here’s Everything You Need to Know About the ‘Starbucks of China,’ Barron’s (May 17, 2019), https://www.barrons.com/articles/luckin-coffee-ipo-stock-price-51558054869. Each ADS represented eight ordinary shares of Luckin.
 Securities and Exchange Commission v. Luckin Coffee Inc., No. 1:20-cv-10631 (S.D.N.Y. Dec. 16, 2020), https://www.sec.gov/litigation/complaints/2020/comp-pr2020-319.pdf.
 All amounts are in U.S. dollars (“USD”). Luckin’s sales of product in China are in RMB, which are equated to USD, and sales of securities in the U.S. are in USD.
 Securities and Exchange Commission, Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges, Lit. Release No. 24987 (Dec. 16, 2020), https://www.sec.gov/news/press-release/2020-319 (“Press Release”). We doubt that any material amount—if any—of funds stolen from investors can or will be recovered. This is why the fraud was a success: the still-unnamed culprits are now richer by at least $200 million.
 The auditor, Ernst & Young Hua Ming LLP, issued a Consent to use Audit Report on the Consolidated Financial Statements on February 2, 2019.
 Under Rule 405, promulgated under the Securities Exchange Act of 1934 (17 C.F.R. § 230.405), a “foreign private issuer” (FPI) is any foreign issuer other than a foreign government. FPI status is lost if, on the last business day of the issuer’s most recently completed second fiscal quarter, (i) U.S. residents own 50% or more of the issuer’s outstanding voting securities and (ii)(A) the majority of executive officers or directors are U.S. residents or citizens, or (ii)(B) more than 50% of the issuer’s assets are located in the U.S., or (ii)(C), the issuer’s business is administered principally in the U.S. (emphases added).
 Complaint, ¶¶ 21-32.
 Id., at ¶ 32.
 Id. at ¶¶ 30-31.
 Under a Depository Agreement dated May 16, 2019, the ordinary shares were deposited in the Bank of New York Mellon, and the Underwriters issued ADSs on a 1:8 ratio—one ADS to represent 8 ordinary shares.
 Note that even “reviewed” financial statements do not undergo the same level of scrutiny as audited financial statements.
 FPIs use SEC Forms 6-K to report other material information, as necessary under the listing exchange or home-country requirements.
 Luckin Coffee, Inc., News Release, Luckin Coffee Inc. Announces Unaudited Second Quarter 2019 Financial Results, GlobeNewswire (Jul. 14, 2019), https://www.globenewswire.com/news-release/2019/07/24/1887128/0/en/Luckin-Coffee-to-Announce-Second-Quarter-2019-Financial-Results-on-August-14-2019.html.
 The Company claimed that total net revenues from all activities equaled $132.4 million, constituting an increase of 648.2% from the second quarter of 2018, an increase attributed to “a significant increase in the number of transacting customers, an increase in effective selling prices, and the number of products sold.” Id.
 Monex Securities Australia Pty Ltd., Trading Ideas: Luckin Coffee 2Q 2019 Results (Oct. 7, 2019), https://www.monexsecurities.com.au/insights/news/luckin-coffee-2q-2019-results.
 Luckin Coffee, Inc., News Release, Luckin Coffee Inc. Announces Unaudited Third Quarter 2019 Financial Results, (Nov. 13, 2019), https://investor.luckincoffee.com/news-releases/news-release-details/luckin-coffee-inc-announces-unaudited-third-quarter-2019.
 The Company claimed that total net revenues from all activities equaled $215.7 million, constituting an increase of 540.2% from the third quarter of 2018. Id.
 See Complaint, ¶ 53.
 On January 9, 2020, Luckin filed its Form F-1 for its second public offering, and the next day, ADSs were priced at $42 each ($5.25 per ordinary share). The market for Luckin’s ADSs closed at $44.37, and the follow-on public offering closed on January 14, 2020, by January 17, 2020, its ADSs were valued at $50.02. See Luckin Coffee, Inc., Registration Statement (Form F-1) (Jan. 9, 2020), https://www.sec.gov/Archives/edgar/data/1767582/000104746920000144/0001047469-20-000144-index.htm; Anthony Russo, Luckin Coffee’s Proceeds From Follow-on Offerings Surpass IPO, Capital Watch (Jan. 20, 2020), https://www.capitalwatch.com/article-4895-1.html.
 Luckin Coffee, Inc., News Release, Luckin Coffee Inc. Announces Completion of Follow-on Public Offering of American Depositary Shares (Jan. 15, 2020), https://www.globenewswire.com/news-release/2020/01/14/1970571/0/en/Luckin-Coffee-Inc-Announces-Completion-of-Follow-on-Public-Offering-of-American-Depositary-Shares.html.
 Foreign private issuers have up to six months after the fiscal year to file Form 20-F. The SEC conditionally extended the filing period by 45 days as a consequence of COVID-19. Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies, Exchange Act Release No. 88465 (Mar. 25, 2020), https://www.sec.gov/rules/exorders/2020/34-88465.pdf.
 The Report appears to have been posted on January 9, 2020, and it can be found at: https://cdn.gmtresearch.com/public-ckfinder/Short-sellers/Unknown%20author/Luckin%20Coffee_Anonymous.pdf.
 Id. at 1.
 GMT Research, Hall of Shame (2020), https://www.gmtresearch.com/en/about-us/hall-of-shame/luckin-coffee-lk-us/.
 See, e.g., Amelia Lucas, Luckin Coffee fires CEO, COO after sales fraud investigation, CNBC (May 12, 2020), https://www.cnbc.com/2020/05/12/luckin-coffee-fires-ceo-coo-after-sales-fraud-investigation.html.
 Nasdaq, Inc., News Release, Nasdaq Halts Luckin Coffee Inc., GlobeNewswire (Apr. 9, 2020), https://www.globenewswire.com/news-release/2020/04/09/2014519/0/en/Nasdaq-Halts-Luckin-Coffee-Inc.html#:~:text=NEW%20YORK%2C%20April%2009%2C%202020,status%20in%20Luckin%20Coffee%20Inc.&text=Trading%20in%20the%20company’s%20stock,last%20sale%20price%20of%20%244.3.
 Isa Martinez, Luckin Coffee delays publishing 2019 annual report over fraud probe, S&P Global Market Intelligence (June 16, 2020), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/luckin-coffee-delays-publishing-2019-annual-report-over-fraud-probe-59058938.
 Luckin Coffee, Inc., News Release, Luckin Coffee Comments on Join Provisional Liquidators’ First Report Provided to the Grand Court of the Cayman Islands (Dec. 17, 2020), https://www.globenewswire.com/news-release/2020/12/17/2146999/0/en/Luckin-Coffee-Comments-on-Joint-Provisional-Liquidators-First-Report-Provided-to-the-Grand-Court-of-the-Cayman-Islands.html.
 Complaint, ¶ 59.
 The role of short sellers in exposing possible and actual securities frauds is perhaps underappreciated. Their profit model, which is a necessary incentive for investing investigative resources, does not diminish their importance in market efficiency.
 According to one report, Luckin’s former chairman, Lu Zhengyao, “is expected to face criminal charges in China after authorities discovered emails in which he instructed colleagues to commit fraud.” Id. But whether he was the primary beneficiary of the fraud or merely assisted in covering it up remains unknown.
 This, of course, is not the case with a large number of foreign companies that trade over U.S. markets as FPIs but have significant assets and operations in the United States and/or have similar regulatory safeguards for shareholders in their home countries as exist in the United States.