Last Friday, the SEC announced it settled an enforcement proceeding against The Cheesecake Factory for misleading COVID-19 disclosures. Among other things, early in the pandemic as the company began transitioning to a take-out and delivery service model, the proceeding alleges the company failed to adequately inform investors of the extent the pandemic had on the company’s operations and financial condition. This excerpt from the SEC’s press release summarizes the allegations:
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.
The Cheesecake Factory proceeding is the SEC’s first enforcement action against a public company for misleading investors about the financial effects of the pandemic and shows the difficulties companies encountered early on in the pandemic. Without admitting or denying the SEC’s findings, The Cheesecake Factory consented to a cease-and-desist order and agreed to pay a $125,000 penalty. If you’re thinking the $125,000 penalty seems fairly light, the SEC’s press release does note the company’s cooperation in the proceeding. At minimum, the action serves as a cautionary reminder about the importance of accurate disclosures, even those made back at the outset of the pandemic, and that the SEC is continuing to scrutinize disclosures related to COVID-19.
-Lynn Jokela, TheCorporateCounsel.net December 7, 2020