SEC announces first charges against a public company for misleading investors about the financial effects of the pandemic

On Friday, December 4, 2020, the Securities and Exchange Commission announced in a press release that it had settled charges against The Cheesecake Factory for misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition. According to the SEC, the action is the SEC's first charging a public company for misleading investors about the financial effects of the pandemic.

SEC Chairman Jay Clayton noted that many public companies have discharged their disclosure obligations in a commendable manner during the pandemic. He added: "As our local and national response to the pandemic evolves, it is important that issuers continue their 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 press release explained the impugned disclosures and the penalty as follows:

[I]n its SEC filings on March 23 and April 3, 2020, The Cheesecake Factory stated that its restaurants were "operating sustainably" during the COVID-19 pandemic. According to the order, the filings were materially false and misleading because the company's internal documents at the time showed that the company was losing approximately $6 million in cash per week and that it projected that it had only 16 weeks of cash remaining. The order finds that although the company did not disclose this internal information in its March 23 and April 3 filings, the company did share this information with potential private equity investors or lenders in connection with an effort to seek additional liquidity. The order also finds that, although the March 23 filing described actions the company had undertaken to preserve financial flexibility during the pandemic, it failed to disclose that The Cheesecake Factory had already informed its landlords that it would not pay rent in April due to the impacts that COVID-19 inflicted on its business.


[…] Without admitting the findings in the order, The Cheesecake Factory agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the charged provisions. In determining to accept the settlement, the SEC considered the cooperation afforded by The Cheesecake Factory.

Canadian regulators have also emphasized the importance of timely and appropriate disclosure in the context of the pandemic (see, e.g., previous posts on this blog). While we are unaware of any pending regulatory action in Canada that could give rise to a similar outcome with respect to COVID-19 related disclosure, similar principles would be instructive in relation to Canadian issuers.