Cheesecake Factory penalized for 'misleading' disclosures about COVID-19 impact on business

Posted at 8:32 AM, Dec 04, 2020
and last updated 2020-12-04 11:47:47-05

LOS ANGELES (CNS) - The Securities and Exchange Commission announced Friday that Calabasas-based Cheesecake Factory Inc. will pay a $125,000 penalty for making "false or misleading" disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition.

This is the first time the SEC has brought allegations against a public company for misleading investors about the financial effects of the pandemic.

According to the SEC's order, the Cheesecake Factory restaurant group said in regulatory filings in March and April that its eateries were "operating sustainably," while failing to disclose that the company was losing roughly $6 million in cash per week and had just 16 weeks of cash remaining.

The order finds that although the company did not disclose the information in its filings, the group did share the particulars with potential private equity investors or lenders as it sought additional liquidity during the public health crisis.

Without admitting the SEC's findings, the restaurant company agreed to pay the penalty and to cease-and-desist from further violations of the charged provisions. In determining to accept the settlement, the SEC said it considered the cooperation afforded by the company.

A Cheesecake Factory representative pointed to a disclosure form filed Friday in which the company stated it was in full compliance with the cease- and-desist order and that the company "fully cooperated with the SEC in the settlement" without admitting or denying the regulators' allegations.

The order also finds that although the March filing described actions the company had undertaken to preserve financial flexibility during the pandemic, it failed to disclose that Cheesecake Factory already had informed its landlords that it would not pay rent in April due to the impacts that COVID- 19 inflicted on its business.

"During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of COVID-19 on their operations and financial condition," SEC Chairman Jay Clayton said. "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. It is also important that issuers who make materially false or misleading statements regarding the pandemic's impact on their business and operations be held accountable."

Cheesecake Factory had notified its landlords that it wouldn't pay rent on April 1 due to financial complications stemming from the coronavirus outbreak. A letter sent by Chief Executive David Overton to the restaurant group's landlords -- many of which are shopping mall operators -- was released publicly in March by Eater L.A.

The company has 294 restaurants in North America, 39 in California and five in San Diego County.

Its largest landlord is Indianapolis, Indiana-based real estate company Simon Property Group, which provides space for 41 Cheesecake Factory locations, according to the San Fernando Valley Business Journal.

"When public companies describe for investors the impact of COVID-19 on their business, they must speak accurately," said Stephanie Avakian, director of the SEC's Division of Enforcement. "The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID- related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations."