On December 4, 2020, the Securities and Exchange Commission (SEC) announced in a Press Release that it had settled charges with The Cheesecake Factory Incorporated (The Cheesecake Factory) for making misleading disclosures about the impact of COVID-19 on its business. This settlement marks the first of its kind against a public company for misleading investors about its financial condition in the midst of the pandemic.
The SEC’s Order noted that such misleading disclosures were included by The Cheesecake Factory in press releases attached as exhibits to Forms 8-K furnished to the SEC on March 23 and April 3, 2020. Among other things, the press releases included disclosures such as that the company’s restaurants were “operating sustainably” and that an off-premise model of to-go and delivery orders allowed the company’s restaurants to “operate sustainably” during the COVID-19 pandemic. However, at the time of SEC filings, the company’s internal documents showed that the company was losing approximately $6 million in cash per week and that it had only approximately 16 weeks of cash remaining. Further, and among other findings in the Order, the company disclosed in the March 23rd filing that it had undertaken steps to preserve financial flexibility, but failed to disclose that just days prior it had sent a letter to its landlords saying that it would not be paying April rent due to decreased restaurant traffic, which put a financial strain on the business.
In the Press Release, SEC Chairman Jay Clayton commended public companies as a group stating that many public companies have and continue to meet their disclosure obligations related to the COVID-19 pandemic, but that “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.” SEC Chairman Jay Clayton also noted that issuers making materially false or misleading statements about the impact of COVID-19 will be held accountable.
The Order finds that The Cheesecake Factory violated Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20 and 13a-11 thereunder, which collectively require certain issuers to include in current reports on Form 8-K material information so that statements on such reports are not misleading. 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 above referenced provisions.
Michael Best’s Securities & Capital Markets team has experts who advise companies on compliance with SEC regulations, including COVID-19 disclosures and other communications with the public. Please do not hesitate to contact a member of the Securities & Capital Markets team for additional information.