Public Company Settles with SEC Over Misleading COVID-19-Related Disclosures
On December 4, The Cheesecake Factory Incorporated (“the Company”) agreed to settle claims brought by the Securities and Exchange Commission (the “Commission”) that the Company had made materially misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition. Without admitting to the SEC’s findings, the Company agreed to cease and desist from any future Exchange Act violations and to pay a $125,000 civil money penalty for alleged material misstatements to investors in violation of Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20, which require current and accurate financial disclosures. This represents the first enforcement action brought by the Commission against a public company for misleading investors about the financial impacts of the pandemic.
As did much of the hospitality industry when the novel coronavirus spread through the United States in early 2020, the Company faced unprecedented economic challenges resulting from reduced restaurant traffic. According to the Commission, the Company took a number of early steps to stay afloat and liquid, including sending notices to landlords that the Company would not pay rent in April and that it would draw down the last $90 million on a revolving line of credit. The Company also reportedly sought additional lines of liquidity from lenders and solicited private equity investments. According to the Commission, internal presentations suggested that the Company had enough cash on hand to support just 16 weeks of operations.
In March and April 2020, the Company filed several disclosures on Form 8-K, which had the effect of updating the market about its financial condition. According to the Commission, however, some of the 8-Ks omitted key information that would have intimated more clearly the Company’s deteriorating financial condition. For example, the SEC criticized the Company for only reporting its notice to landlords after that information became public through press reports. Another 8-K reported on the Company’s first-quarter sales results and represented that the restaurants were operating sustainably. The SEC claimed, however, that omitted from that disclosure were expenses attributable to the Company’s corporate operations and reports that the Company was losing approximately $6 million in cash per week.
The Commission concluded that two of the Company’s March and April 8-Ks were materially false and misleading in violation of Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20, which together require issuers to file with the Commission Form 8-Ks that are current and accurate, and contain material information necessary to make the required statements made in the reports not misleading.
The COVID-19 pandemic has unleashed widespread financial difficulties for companies across the U.S. economy and will continue to pose challenges to companies as they seek to ensure accurate and timely disclosures in times of uncertainty. Despite these extraordinary challenges, the settlement serves as a reminder that the SEC will take an aggressive approach if it believes that optimism reported externally does not match pessimism felt internally at companies. Companies should thus continually review their risk factors and be extremely careful as to any definitive statements that they may make in these uncertain times.