Shares of Starbucks (SBUX) are on the rise on Thursday after its competitor in China, Luckin Coffee (LK), announced that it is probing "fabricated transactions" that make its prior guidance unreliable and prompt an investigation of its financial reports.

PROBING 'FABRICATION' OF TRANSACTIONS: Luckin Coffee said in a statement that its COO Jian Liu and several employees engaged in misconduct and that the company has formed an independent special committee to oversee the investigation. Further, Luckin warned investors should no longer rely upon prior guidance.

"The Special Committee brought to the attention of the Board information indicating that, beginning in the second quarter of 2019, Jian Liu, the chief operating officer and a director of the company, and several employees reporting to him, had engaged in certain misconduct, including fabricating certain transactions. The Special Committee recommended certain interim remedial measures, including the suspension of Jian Liu and such employees implicated in the misconduct and the suspension and termination of contracts and dealings with the parties involved in the identified fabricated transactions," Luckin Coffee said.

"The company will take all appropriate actions, including legal actions, against the individuals responsible for the misconduct. The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2B. Certain costs and expenses were also substantially inflated by fabricated transactions during this period. The above figure has not been independently verified by the Special Committee, its advisors or the company's independent auditor, and is subject to change as the Internal Investigation proceeds. The company is assessing the overall financial impact of the misconduct on its financial statements.

"As a result, investors should no longer rely upon the company's previous financial statements and earning releases for the nine months ended September 30, 2019 and the two quarters starting April 1, 2019 and ended September 30, 2019, including the prior guidance on net revenues from products for the fourth quarter of 2019, and other communications relating to these consolidated financial statements."

WHAT'S NOTABLE: Earlier this year, shares of China's Luckin Coffee were under pressure after short-seller Muddy Waters shared a report that accused the company of both fraud and having a "fundamentally broken business." "Luckin knows exactly what investors are looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence," according to the report that was shared by Carson Block's firm. The anonymous report, which claims to demonstrate "how Luckin faked its numbers and why its business model is inherently flawed," was not written by Muddy Waters but in a tweet the firm said it is short Luckin shares and views "the work as credible."

After Muddy Waters went short, Citron Research recommended investors buy shares of Luckin Coffee, announcing via Twitter that it has a long position in Luckin Coffee. "We also rec. this report but all data from Biz Con China and App download and calls with competitors confirm financials. $LK biz is on fire in China. Citron has respect for Muddy, but this anon. report will fall short on accuracy. Expect LK management response," Andrew Left's Citron Research wrote in a tweet.

PRICE ACTION: In morning trading, shares of Luckin Coffee have plunged almost 76% to $6.37, while Starbucks' stock has gained about 3% to $64.41.