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Last Friday, the SEC announced it settled an enforcement proceeding against The Cheesecake Factory for misleading Covid-19 disclosures. Among other things, early in the pandemic as the company began transitioning to a take-out and delivery service model, the proceeding alleges the company failed to adequately inform investors of the extent the pandemic had on the company’s operations and financial condition. This excerpt from the SEC’s press release summarizes the allegations:

As set forth in the SEC’s order, in 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.

The Cheesecake Factory proceeding is the SEC’s first enforcement action against a public company for misleading investors about the financial effects of the pandemic and shows the difficulties companies encountered early on in the pandemic. Without admitting or denying the SEC’s findings, The Cheesecake Factory consented to a cease-and-desist order and agreed to pay a $125,000 penalty. If you’re thinking the $125,000 penalty seems fairly light, the SEC’s press release does note the company’s cooperation in the proceeding. At minimum, the action serves as a cautionary reminder about the importance of accurate disclosures, even those made back at the outset of the pandemic, and that the SEC is continuing to scrutinize Covid-related disclosures.

Enforcement Proceedings: Earning Extra Credit for Cooperation

As mentioned in the SEC’s press release about The Cheesecake Factory, cooperation factored into the SEC’s determination to accept the settlement. When the SEC closed out its fiscal year, some may have read news reports of an SEC enforcement matter involving inaccurate disclosures concerning BMW’s U.S. retail sales volume while it conducted bond offerings. A Simpson Thacher memo outlines key takeaways from the case – one being that the SEC may give extra credit for cooperation during the pandemic. Here’s the memo’s takeaways:

First, the case serves as a reminder that the SEC continues to focus on bond offering disclosures, even in the absence of findings or allegations that proper disclosures would have impaired the company’s ability to make interest payments or repay the principal to bondholders. The memo reminds bond issuers to exercise caution in describing particular data points as important business barometers.

Second, the memo also notes that the case demonstrates that the SEC is prepared to give special credit for cooperation during the pandemic. The SEC’s order is also notable in its detailed description of BMW’s cooperation, and its express reference to challenges raised by the global COVID-19 pandemic. Specifically, the order commends the company for complying with the SEC’s requested schedule and its prompt collection and production of ‘a significant volume of electronic documents, including documents that would otherwise have been difficult and time-consuming for [the SEC] to obtain; documents from sources outside of the company’s corporate offices, such as BMW employees working from remote locations; and translations of key documents’ The order notes that the company additionally made several current and former employees available for interviews with the SEC, and provided the SEC with ‘presentations and narrative submissions that highlighted critical facts.’

Insofar as the items the SEC cites as evidence of BMW’s cooperation are part of the standard cooperation checklist, the case may be suggestive of the SEC’s willingness, during the COVID-19 pandemic, to accord extra credit for what some might view as ordinary course cooperation. At a minimum, the case may serve as useful precedent for other companies negotiating settlements with the SEC to argue that their cooperation during the pandemic warrants a reduced penalty (or even reduced charges).

This K&L Gates blog includes practical considerations about cooperation gleaned from remarks by Enforcement Division Associate Director Anita Bandy at the recent SEC Speaks conference:

Cooperation is largely still evaluated under the factors announced in the “Seaboard Report” issued by the SEC in 2001. The seminal consideration is whether the cooperation substantially enhanced the quality and efficiency of the investigation. In a recent case, for example, the respondent was forthcoming and proactive and, notwithstanding the complexity of the matter and the difficulties presented by collecting evidence internationally during the pandemic, worked to produce quickly documents and witnesses such that the investigation was resolved within ten months. As a result of this cooperation and other substantial remediation efforts, the Commission imposed a reduced penalty.

Tomorrow’s Webcast: “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments”

Tune in tomorrow at 11 a.m. Eastern for our webcast – “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments” – to hear Scott Kimpel of Hunton Andrews Kurth, John Newell of Goodwin Procter and Kenisha Nicholson of Wilson Sonsini discuss how the SEC’s recent amendments to modernize Regulation S-K will affect your next Form 10-K, including, among other things, how to tackle human capital disclosures, the impact on disclosure controls & procedures and other interpretive issues.

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– Lynn Jokela