Summary

The Securities and Exchange Commission (SEC) announced today that it has settled its case against The Cheesecake Factory charging the national restaurant chain with providing misleading disclosures in filings—the first SEC enforcement action related to disclosures about the impact of the COVID-19 pandemic. 

The Upshot

• The SEC found that disclosures by The Cheesecake Factory Incorporated about the impact of the COVID-19 pandemic were materially misleading, and that the company violated Section 13(a) of the Securities Exchange Act of 1934, as amended, and Rules 13a-11 and 12b-20 thereunder, governing periodic reporting obligations.
• Without admitting to the SEC’s findings, The Cheesecake Factory agreed to pay a $125,000 penalty and to cease and desist from further violations of the charged provisions.
• SEC Chairman Jay Clayton reiterated that, as the pandemic evolves, public companies should take a “proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations.”

The Bottom Line

We expect that this will not be the last SEC enforcement action focusing on disclosures by public companies relating to the impact of the COVID-19 pandemic, and encourage public companies to evaluate their COVID-19 disclosures to ensure they are providing complete and accurate disclosures to investors as the pandemic evolves and a vaccine grows nearer.

FULL ALERT

The Securities and Exchange Commission (SEC) announced today that it has settled its case against The Cheesecake Factory charging the national restaurant chain with providing misleading disclosures in filings—the first SEC enforcement action related to disclosures about the impact of the COVID-19 pandemic. 

According to the SEC’s order, The Cheesecake Factory indicated in press releases attached to Current Reports on Form 8-K filed on March 23 and April 3 that its restaurants were “operating sustainably” during the COVID-19 pandemic. At the same time, the company’s internal documents showed that the company was losing $6 million in cash per week and the company’s cash was expected to last for only 16 weeks, information that the company had shared with potential private equity investors and lenders. In addition, the company had provided notice on March 18 to its landlord that the company could not pay its rent due in April because of the impact of the pandemic on its business, which was not disclosed to investors at the time of the March 23 Form 8-K filing. In light of this, the SEC found that The Cheesecake Factory’s disclosures about the impact of the COVID-19 pandemic were materially misleading and the company violated Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder, which collectively require every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the SEC accurate current reports on Form 8-K that contain material information necessary to make the required statements made in the reports not misleading. The Cheesecake Factory agreed to settle with the SEC and to pay a $125,000 penalty.

In the SEC’s press release announcing the action, SEC Chairman Jay Clayton reiterated that, as the pandemic evolves, public companies should take a “proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations.” Stephanie Avakian, the Director of the SEC’s Division of Enforcement, stated that the agency will continue to focus on COVID-19 disclosures to ensure that investors are provided with accurate and timely information.

We expect that this will not be the last SEC enforcement action focusing on disclosures by public companies relating to the impact of the COVID-19 pandemic, and we encourage public companies to evaluate their COVID-19 disclosures to ensure they are providing complete and accurate disclosures to investors as the pandemic’s potential impact evolves, including with the expected approval and distribution of vaccines.

Stimulus Fraud

While the above case marks the SEC’s first enforcement action against a public company for allegedly misleading disclosures in light of the pandemic, there have been numerous other government enforcement actions arising from the COVID-19 stimulus packages. Ballard Spahr’s Stimulus Fraud Tracker monitors stimulus-related government enforcement actions nationwide, across agencies.