SEC Announces First-Ever Charges Against a Company for Misleading Disclosures About Effects of COVID-19 Pandemic
Officials emphasize the importance of tailoring disclosures to company- and industry-specific effects of the pandemic.
On December 3, 2020, the U.S. Securities and Exchange Commission ("SEC") announced its first charges against a public company for making misleading disclosures about the impact of COVID-19 on its business operations and financial condition. The Cheesecake Factory Incorporated ("company") agreed to pay a $125,000 fine and to cease and desist from further violations of Section 13(a) of the Securities Exchange Act and Rules 13a-11 and 12b-20, which collectively require issuers to file accurate SEC reports.
While the company had issued several disclosures regarding the effect of the pandemic on its business, the settled charges focused on disclosures made in March and April 2020 that the SEC described as "materially false and misleading," including statements that the company's restaurants were "operating sustainably" under its current model. In contrast, contemporaneous internal documents the company shared with potential investors and lenders showed that the company was losing approximately $6 million a week and had only 16 weeks of cash remaining even after a $90 million drawdown of a credit facility. In addition, while the March disclosure described actions taken by the company to preserve financial flexibility, it failed to disclose that the company had already informed landlords that it would not pay rent in April because of the impact of the pandemic on its financial condition. In determining to accept the offer of settlement on non-fraud charges, the Commission took into account the company's cooperation.
The SEC's announcement of the settled charges notably included a statement from outgoing Chair Jay Clayton reiterating that public companies should undertake "a proactive, principles-based approach" to disclosures that is tailored to the "firm and industry-specific effects of the pandemic" relating to business and operations. The Chair also warned that "issuers who make materially false or misleading statements regarding the pandemic's impact on their business and operations [will] be held accountable."
Those statements are consistent with the messaging from the SEC early on in the pandemic that the Enforcement Division is committed to scrutinizing COVID-19-related disclosures to ensure that investors receive accurate and timely information. The Enforcement Division's annual report for 2020 stated that its staff had triaged approximately 16,000 tips, complaints, and referrals since mid-March 2020 (a 71% increase over the prior year) and had opened more than 150 COVID-19-related inquiries and investigations as of September 30, 2020. Despite the challenges facing businesses during the pandemic, it is important that public company disclosures not only fully address company- and industry-specific effects of COVID-19 on its operations and financial conditions, but also be consistent with internal reports and communications with third parties.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.