SEC Charges The Cheesecake Factory For Misleading COVID-19 Disclosures

On Friday, the Securities and Exchange Commission (the “SEC”) announced that it had settled charges against The Cheesecake Factory Incorporated (CAKE) for making misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition.

As part of the settlement, Cheesecake Factory agreed to pay $125,000 to the SEC within 15 days.

The action is the SEC’s first charging a public company for misleading investors about the financial effects of the pandemic.

According to the SEC Order, in mid-March 2020, Cheesecake Factory, faced with the impact of the COVID-19 pandemic, issued several disclosures regarding the effect of, and its response to, the pandemic. Certain disclosures failed to adequately inform investors of the extent of COVID-19’s impact on the company’s operations and financial condition in the period of late-March through mid-April 2020 when the company obtained additional financing.

Among other things, on March 18, 2020, the company sent a letter to its landlords saying that it would not be paying April rent due to the negative impact of the virus on its business operations. 

In addition, on March 23, 2020, the company drew down the last $90 million on a revolving line of credit. As of April 1, 2020, the company had approximately $65 million of cash and cash equivalents remaining.

By at least March 23, 2020, the company was actively seeking additional liquidity through either the incurrence of debt through lenders or the issuance of equity to private equity investors with the goal of raising at least $100 million. In presentations shared with lenders and potential private equity investors, Cheesecake Factory disclosed its cash position and projected that the company had cash to support approximately 16 weeks of operations under the prevailing circumstances. During this time period, internal Cheesecake Factory documents noted that the company was experiencing a negative cash flow rate of $6 million per week.

On March 23, 2020, Cheesecake Factory issued a Form 8-K disclosing, among other things, that it was withdrawing previously-issued financial guidance due to economic conditions caused by COVID-19. Cheesecake Factory furnished, as an exhibit to the Form 8-K, a copy of its public press release dated March 23, 2020, that provided a business update regarding the impact of COVID-19. According to the press release, Cheesecake Factory announced that it was transitioning to an “off-premise model” (i.e., to-go and delivery) that was “enabling the Company’s restaurants to operate sustainably at present under this current model.” 

The 8-K and the attached press release did not disclose the landlord letters or the company’s negative cash flow rate.

Two days later, on March 25, 2020, the media reported that that Cheesecake Factory had sent a letter to each of its restaurants’ landlords on March 18 stating that it was not going to pay its rent for April 2020, and included a copy of one of the landlord letters signed by David Overton, the Chairman, Founder and CEO of the Cheesecake Factory Incorporated.

Following the media reports, on March 27, 2020, Cheesecake Factory issued a Form 8-K disclosing that it was not planning to pay rent in April and that “it was in various stages of discussions with its landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of COVID-19 related closure.” The company also disclosed that, effective as of April 1, 2020, it had reduced compensation for executive officers, its Board of Directors, and certain employees. The company also announced that it had furloughed approximately 41,000 employees but allowed them to retain their benefits and insurance until June and provided them with a daily complimentary meal from their restaurant. 

On April 3, 2020, Cheesecake Factory furnished a Form 8-K to the Commission that attached a copy of an April 2, 2020 public press release as an exhibit. The April 2 press release provided a preliminary Q1 2020 sales update given the impact of COVID-19. Among other things, Cheesecake Factory again disclosed in the press release that “the restaurants are operating sustainably at present under this [off-premise] model.”

Cheesecake Factory’s disclosures on March 23 and April 3 regarding the sustainability of its restaurant operations did not disclose that Cheesecake Factory was excluding expenses attributable to corporate operations from its claim of sustainability; that the company was, in fact, losing approximately $6 million in cash per week; and that it had only approximately 16 weeks of cash remaining, even after the $90 million revolving credit facility borrowing.

Based on the foregoing, the SEC determined that the Cheesecake Factory’s March 23 and April 3, 2020 Forms 8-K were materially false and misleading.

On April 20, 2020, Cheesecake Factory announced a $200 million subscription agreement for the sale of convertible preferred stock to a private equity investor, enhancing the company’s liquidity position.

As a result of the conduct described above, the SEC determined that the Cheesecake Factory violated Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder, which collectively require every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission accurate current reports on Form 8-K that contain material information necessary to make the required statements made in the reports not misleading.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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