For Misleading COVID-19 Disclosures
The Securities and Exchange Commission announced last week that it settled charges against The Cheesecake Factory Incorporated for making misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition. The action is the SEC's first charging a public company for misleading investors about the financial effects of the pandemic.
As set forth in the SEC's order, in its SEC filings on March 23 and April 3, 2020, The Cheesecake Factory stated that its restaurants were "operating sustainably" during the COVID-19 pandemic. According to the order, the filings were materially false and misleading because the company's internal documents at the time showed that the company was losing approximately $6 million in cash per week and that it projected that it had only 16 weeks of cash remaining. The order finds that although the company did not disclose this internal information in its March 23 and April 3 filings, the company did share this information with potential private equity investors or lenders in connection with an effort to seek additional liquidity. The order also finds that, although the March 23 filing described actions the company had undertaken to preserve financial flexibility during the pandemic, it failed to disclose that The Cheesecake Factory had already informed its landlords that it would not pay rent in April due to the impacts that COVID-19 inflicted on its business.
"During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of COVID-19 on their operations and financial condition," said SEC Chairman Jay Clayton. "As our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable."
"When public companies describe for investors the impact of COVID-19 on their business, they must speak accurately," said Stephanie Avakian, Director of the Division of Enforcement. "The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations."
The SEC's order finds that The Cheesecake Factory violated reporting provisions of the federal securities laws. Without admitting the findings in the order, The Cheesecake Factory agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the charged provisions. In determining to accept the settlement, the SEC considered the cooperation afforded by The Cheesecake Factory.
The SEC's investigation was conducted Adam J. Eisner, Brian R. Higgins, W. Bradley Ney, and Paul H. Pashkoff. The case was supervised by Melissa Hodgman and Melissa A. Robertson.
A public statement on the importance of disclosure, issued by Chairman Clayton and William Hinman, the Director of the Division of Corporation Finance, can be found here.