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SEC Takes First Enforcement Action for Misleading Pandemic Disclosures

    Client Alerts
  • December 08, 2020

On December 4, the U.S. Securities and Exchange Commission (SEC) announced that it had settled charges with The Cheesecake Factory for its allegedly false and misleading disclosures about the COVID-19 pandemic’s effects on its operational and financial position. This settlement serves as a strong reminder for public companies to ensure that the information they disclose to the public is timely and consistent with their current operational and financial position.

As set forth in its final order against The Cheesecake Factory, the SEC notes the company faced “an unprecedented challenge to its business arising from the impact of the COVID-19 pandemic.” As a result of this unprecedented challenge, the final order lists the following actions the company took to conserve its cash:

  • On March 18, the company sent its landlords a letter that they would miss April’s rent because of a “severe decrease in restaurant traffic [due to COVID-19 that] has severely decreased our cash flow and inflicted a tremendous financial blow to our business.” Press articles issued on March 25 reported on this letter and included a copy of one such letter.
  • On March 23, the company drew the last $90 million from its revolving line of credit.
  • By no later than March 23, the company was looking to raise at least $100 million in debt or equity. Presentations to lenders and private equity investors disclosed that it believed it had enough cash for operating approximately 16 weeks.

The SEC also noted in the final order that the company’s cash position as of the beginning of the quarter starting on April 1 was approximately $65 million and it was losing approximately $6 million of cash per week.

The company made the following disclosures with the SEC during this same time:

  • On March 23, the company furnished a press release as an exhibit to a Form 8-K withdrawing financial guidance it had previously issued, disclosing the $90 million credit line draw, and providing an update that it was moving to an “off-premise model” for “enabling the Company’s restaurants to operate sustainably at present under this current model.”
  • On March 27, the company provided information in a Form 8-K regarding its plan to not pay rent in April as well as announcing a reduction in compensation for executive officers, its board, and certain employees, as well as the furlough of approximately 41,000 employees.
  • On April 3, the company furnished a press release as an exhibit to a Form 8-K that provided a preliminary first quarter sales update stating that “the restaurants are operating sustainably at present under this [off-premise] model.”

The SEC found the company’s March 23 and April 3 disclosures were materially false and misleading because of a failure to disclose that it was not including corporate operational expenses when claiming sustainability, it was losing $6 million a week in cash, and it had cash on hand after the $90 million draw to operate for approximately 16 weeks. The SEC also found the company’s March 23 disclosure materially false and misleading for not disclosing the letter to its landlords. In settling the charges, the company was found to violate Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder, and it was ordered to cease and desist from any future violations of Section 13(a) and its accompanying rules, as well as to pay a $125,000 penalty.

In a press release announcing the charges, Director of the Division of Enforcement Stephanie Avakian foreshadowed that pandemic-related disclosures will continue to be an area of SEC enforcement focus going forward: “The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information.”

For more information, please contact us or your regular Parker Poe contact.