SEC Charges Public Company for Misleading COVID-19 Disclosures

The SEC has brought its first enforcement action against a public company relating to disclosure of the financial effect of the pandemic. The Cheesecake Factory Incorporated, without admitting or denying the SEC’s findings, agreed to a cease-and-desist order and payment of a $125,000 civil penalty, settling charges of making misleading disclosures in two Form 8-Ks:

• In both reports, dated March 23 and April 3, 2020, the company stated that in adopting an “off-premises model” for its restaurants (shifting to “to-go” and delivery offerings) it would be able to operate “sustainably.” Separately, the company informed prospective lenders and private equity investors that it was losing about $6 million per week and had about 16 weeks of cash remaining, even after fully drawing down its credit facility.
• The March 23 report detailed plans to address the pandemic and noted the company was evaluating additional measures, but the report did not disclose that the company had notified its landlords of insufficient cash flow to pay rent in the next month. After media reported on the notice to landlords, the company furnished information in a March 27 Form 8-K about ongoing discussions with landlords.

The SEC determined the March 23 and April 3 reports were materially false and misleading in violation of Exchange Act Section 13(a) and Rules 13a-11 and 12b-20. This serves as a reminder that companies must take care to proactively and accurately keep investors informed of current and anticipated material impacts of COVID-19.

The SEC order is available here, and the press release is available here.