By Rachel O'Brien

Law360 (December 4, 2020, 11:19 AM EST) -- The Cheesecake Factory agreed to pay a $125,000 civil penalty to the U.S. Securities and Exchange Commission on Friday to settle allegations the restaurant chain hid from investors that its finances were struggling amid the COVID-19 pandemic.

The SEC alleged the company violated reporting provisions of the federal securities laws when it said in press releases attached to its March 23 and April 3 filings that its restaurants were "operating sustainably" during the coronavirus pandemic, when in fact, it was losing about $6 million in cash per week and only had an estimated 16 weeks of cash remaining.

While The Cheesecake Factory omitted this from its filings, it did share this information with potential private equity investors or lenders when seeking additional liquidity, the SEC said.

In a March 23 Form 8-K, the company detailed its efforts to keep its financial flexibility during the pandemic, but it hid that The Cheesecake Factory already told its landlords it wouldn't pay its April rent, the SEC said.

The company didn't admit or deny the SEC's allegations in agreeing to the settlement in an administrative proceeding, which includes an order to cease-and-desist from further violations of the charged securities provisions.

"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," SEC Chairman Jay Clayton said in a statement. "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."

The Cheesecake Factory issued several disclosures about the effect of, and its response to, the pandemic, but some 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," the SEC order said.

To conserve cash, the company notified its landlords on March 18 of its plan to withhold rent due to the "severe decrease in restaurant traffic [due to COVID-19 that] has severely decreased our cash flow and inflicted a tremendous financial blow to our business," according to the SEC order.

On March 23, The Cheesecake Factory drew down the last $90 million on a revolving line of credit, which it disclosed in a press release. At the start of the second quarter on April 1, the company had approximately $65 million of cash and cash equivalents, the SEC said.

By then, the company was seeking additional liquidity by incurring more debt through lenders or from private equity investors, with the goal of raising at least $100 million, according to the SEC.

The letter to landlords was reported in the press, and on March 27, the company filed a Form 8-K disclosing the plan not to pay April rent, and that, effective April 1, it had reduced compensation for executive officers, its board of directors and certain employees. The company also announced that it had furloughed about 41,000 employees but allowed them to keep their benefits and insurance until June and provided them a daily free meal from the restaurant, the SEC said.

On April 3, the company filed another Form 8-K and attached an April 2 press release that gave a first-quarter of 2020 sales update given the impact of COVID-19, saying that "the restaurants are operating sustainably at present under this [off-premise] model," offering delivery and to-go, the SEC said.

While the company disclosed some of the financial hurdles and steps it was taking to overcome them, omitting the rent letter to landlords, that it was losing $6 million in cash per week and that it had only 16 weeks of cash remaining, even after the $90 million revolving credit facility borrowing, made the March 23 and April 3 filings materially false and misleading, the SEC alleged.

Counsel for The Cheesecake Factory declined to comment Friday.

The SEC's investigation was conducted Adam J. Eisner, Brian R. Higgins, W. Bradley Ney and Paul H. Pashkoff.

The Cheesecake Factory is represented by William R. Baker III of Latham & Watkins LLP.

The case is In the Matter of The Cheesecake Factory Inc., administrative proceeding file number 3-20158, before the U.S. Securities and Exchange Commission.

--Editing by Alyssa Miller.

Update: This story has been updated with more details from the SEC's order.

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