The Cheesecake Factory: First Public Company Charged by the SEC for Misleading COVID-19 Disclosures

On Dec. 4, 2020, the Securities and Exchange Commission announced settled charges against The Cheesecake Factory Incorporated (“Cheesecake Factory”), alleging that Cheesecake Factory had made misleading disclosures about the impact of the COVID-19 pandemic. (The SEC press release is available here.) This is the first enforcement action that the SEC has brought against a public company relating to disclosures regarding the effects of the pandemic.  As we approach year-end and the drafting by many companies of their annual reports on Form 10-K, the SEC’s order underscores the need for companies to ensure that they have properly evaluated the effect of the pandemic on their businesses and that their statements to investors are complete and accurate.^[1]

In the order, the SEC found that Cheesecake Factory’s March 23 and April 3, 2020, Forms 8-K, attaching Cheesecake Factory press releases, included materially false and misleading disclosures in violation of Section 13(a) of the Securities Exchange Act and Rules 13a-11 and 12b-20.^[2] (Full text of the order is available here.)  In its March 23, 2020, press release, Cheesecake Factory withdrew prior forward-looking guidance.  It went on to state that its restaurants were transitioning to an “off-premises model” that was enabling Cheesecake Factory to “operate sustainably” during the pandemic, among its other efforts to maintain financial flexibility. In a subsequent press release on April 3, 2020, the company reiterated that its restaurants were “operating sustainably at present under this [off-premises] model.”  However, the company failed to state that it was experiencing a negative cash flow rate of about $6 million per week and had only 16 weeks of cash remaining, even though it had drawn down the last $90 million on a revolving credit line. Cheesecake Factory also failed to disclose, in its March 23 Form 8-K and attached press release, that it had already told its landlords it would not pay its April rent due to the financial impact of the COVID-19 pandemic.  The order noted that in presentations shared with lenders and potential private equity investors, Cheesecake Factory disclosed to them its cash position and limited future cash support.  Even though the releases that are the subject of the order disclosed some of the financial difficulties Cheesecake Factory was facing, the SEC found these omissions rendered those disclosures incomplete and materially false and misleading.

Without admitting the findings in the SEC order, Cheesecake Factory agreed to pay a $125,000 penalty as well as to cease and desist from additional violations of the charged provisions. The SEC stated that it considered the company’s cooperation in its investigation when reaching this settlement.

The order is a reminder that companies must consider the completeness as well as the accuracy of their disclosures. This is particularly challenging for distressed companies seeking to provide sufficient disclosure in the face of uncertain and changing financial difficulties. It is also a reminder that information used by an issuer for other purposes, such as raising capital in this matter, or reporting to the board in others, should be considered by those preparing disclosure to assess its accuracy and completeness and may be scrutinized by regulators down the road for the same purpose. Finally, the order demonstrates that the SEC continues to be focused on the adequacy of COVID-related disclosures.  The SEC’s press release announcing the settled action links to a prior statement by SEC Chairman Jay Clayton and William Hinman, the director of the Division of Corporate Finance, issued on April 8, 2020, calling upon companies to provide as much information as is practicable during the pandemic regarding their current financial and operating status, as well as their future operations, and observing that “High-quality disclosure will not only provide benefits to investors and companies, it also will enhance valuable communication and coordination across our economy — including between the public and private sectors — as together we pursue the fight against COVID-19.”

^[1] _{Kramer Levin Naftalis & Frankel LLP issued prior client alerts that addressed the potential for the SEC to bring such actions and laid out the SEC-issued guidance on COVID-related disclosures (available here and here).}

^[2] _{Scienter is not required for a violation of these provisions.}