• The settled order with The Cheesecake Factory underscores the SEC’s continued focus on COVID-related market issues and sends a clear message to participants that even in these times of unprecedented uncertainty, the SEC expects public companies to remain vigilant in ensuring the accuracy and completeness of their public disclosures.
• The settlement demonstrates that inconsistencies between external communications and internal communications between issuers and their other constituents will often be used as critical evidence of misleading statements.
• The eight-month settlement timeline suggests the Division of Enforcement is carefully scrutinizing public company disclosures related to the financial impact of the pandemic.

On December 4, 2020, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) announced a COVID-19 disclosure case against The Cheesecake Factory Incorporated (the “Company”), the SEC’s first such enforcement action against a publicly traded company, alleging that the Company misled investors about the financial effects of the pandemic. The settled order (the “Order”) with the Company underscores the SEC’s continued focus on COVID-related market issues and sends a clear message to the market that even in these times of unprecedented uncertainty, the SEC expects public companies to remain vigilant in ensuring the accuracy and completeness of their public disclosures. It also reinforces that companies must be careful to ensure that their public disclosures are materially consistent with their communications with banks, vendors, and other constituents about their performance.

Facts and SEC Findings. In its Order against the Company, the SEC alleges that the Company’s Form 8-K filed with the Commission on March 23, 2020, including a press release dated the same date, and the Company’s Form 8-K filed with the Commission on April 3, 2020, including a press release dated April 2, 2020, included materially false and misleading disclosures regarding the Company’s financial position and certain steps that the Company began taking to conserve cash and increase liquidity in the near term in response to unprecedented challenges to its business arising from the impact of the COVID-19 pandemic.

According to the SEC’s Order, each press release painted a rosy financial picture of the Company, with the March 23 disclosures indicating that the Company’s shift to a to-go and delivery model enabled its restaurants “to operate sustainably at present under this current model” and the April disclosures repeating the company’s claim that its “restaurants are operating sustainably at present under this [to-go and delivery] model.” None of these public Company statements filed with the SEC disclosed: the Company’s negative cash flow rate of $6 million per week; that the disclosures regarding operating sustainability excluded expenses attributable to corporate operations; or that the Company had only approximately 16 weeks of cash on hand at the time, even after drawing down the last $90 million on a revolving line of credit (the Company disclosed the draw down in its March 23 press release). The Company’s March 23 public disclosures likewise failed to include disclosure consistent with private communications to landlords regarding its planned default on its April rent (private communications publicly confirmed by the Company on March 27 only after press articles noting the fact of such communications began to appear) and made only a nonspecific statement that it was “evaluating additional measures to further preserve financial flexibility.” According to the SEC’s Order, by at least March 23, the Company was actively seeking an outside cash infusion of more than $100 million, and the SEC’s Order alleges that the Company’s disclosures to potential financing partners at that time were more fulsome than its public filings and included the company’s current cash position and its 16-week reserve projection.

The SEC found that the Company’s conduct violated Section 13(a) and Rules 13a-11 and 12b-20 of the Exchange Act, which together require issuers of securities registered pursuant to Section 12 of the Exchange Act to file accurate current reports on Form 8-K that contain material information necessary to make the required statements made in the reports not misleading. Perhaps reflecting the ongoing financial difficulty the pandemic presents, the Company agreed to a relatively modest civil money penalty of $125,000.

SEC’s Approach to COVID-19-Related Disclosures. The SEC’s approach to disclosure during the COVID-19 pandemic has offered relief but also admonition to companies navigating the financial uncertainty caused by the pandemic. On March 23, then-Co-Directors of the Division of Enforcement Stephanie Avakian and Steven Peikin issued a joint statement urging companies to adhere to disclosure controls and procedures to guard against the improper dissemination and misuse of material non-public information. In April, Chairman Jay Clayton and then-Director of the SEC’s Division of Corporation Finance, William Hinman, struck a somewhat softer tone, noting that they “would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.” Just a few weeks later, however, the Division of Enforcement announced that it would actively monitor public filings from issuers in “highly impacted” industries, with a particular focus on identifying disclosures that appeared to be “significantly out of step” with other market participants in the same industry.

In April and May 2020, the SEC brought three other COVID-19-related disclosure actions against private issuers that allegedly made materially misleading claims in press releases related to their efforts to manufacture and sell COVID-19-related products. These three enforcement actions were designed to deter potential bad actors from making use of the securities markets to profit on COVID-19-related schemes. The settlements were announced in the very early days of the pandemic and sent a message to the market that the SEC was acting quickly and decisively to prevent investor harm. However, unlike the recent enforcement action against The Cheesecake Factory, these cases did not focus on financial disclosures related to the impact of the pandemic.

Takeaways. The SEC’s action against The Cheesecake Factory—which was brought approximately eight months after the disclosures were filed—suggests the Division of Enforcement made good on its promise to carefully scrutinize public company disclosures related to the financial impact of the pandemic. It also demonstrates that the inconsistency between external communications and internal communications between issuers and their other constituents will often be used as critical evidence of misleading statements. At the same time, we would note that the charges against the Company did not allege antifraud violations or individual violations, which suggests that the Commission identified mitigating circumstances for the misstatements. We expect the SEC will continue to focus on COVID-19 disclosure-related matters for the foreseeable future given the ongoing market impact of the pandemic.