On December 4, 2020, the U.S. Securities and Exchange Commission ("SEC") announced it had settled its first enforcement action charging a public company for alleged false and misleading statements regarding the financial impact of the COVID-19 pandemic.
SEC took aim at The Cheesecake Factory's statements, early in the pandemic, that it was "operating sustainably." The company made that statement in two press releases filed alongside Form 8-Ks in March and April. But, according to the SEC, internal contemporaneous documents at The Cheesecake Factory showed that, at the time, the company was losing approximately $6 million per week and had only 16 weeks of cash remaining. Further, The Cheesecake Factory's press releases stated the company was taking steps to preserve financial flexibility. But the company did not disclose that, according to the SEC, the company had informed all of its landlords that the company would not pay rent in April due to the "tremendous financial blow" caused by the COVID-19 pandemic. The SEC found that these statements were materially false and misleading and settled with The Cheesecake Factory for a $125,000 penalty.
The SEC warned that it is continuing to scrutinize COVID-related disclosures. The SEC's press release quoted Enforcement Director Stephanie Avakian, stating that the Enforcement Division "will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information."
- Companies should review their disclosures regarding changes in their businesses caused by COVID-19 to provide an accurate assessment of the financial impact of the COVID-19 pandemic. Further, companies should continuously review their disclosure and avoid repeated boilerplate disclosure.
- Companies should ensure there is consistency between communications to investors and communications to other parties, such as private equity investors, lenders, and landlords.
- The SEC will continue to scrutinize COVID-related disclosures to ensure that investors are receiving accurate and timely information. We can expect future enforcement actions, and penalties may be higher than those imposed on The Cheesecake Factory.
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