The Securities and Exchange Commission has settled charges against The Cheesecake Factory 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.
In SEC filings earlier this year, the restaurant chain stated that its restaurants were “operating sustainably” during the COVID-19 pandemic. According to an SEC order, however, 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 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 of the company as it investigated the matter.
The company did not disclose the true impact of the pandemic on its business publically, but did share the information with potential private equity investors or lenders in connection with an effort to seek additional liquidity, in violation of US securities laws. The SEC order also finds that, although a 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.
Keeping Investors Informed
“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 in a statement on the enforcement action. “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,” added 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.” 