Are SEC Enforcement Actions Relating to COVID-Related Disclosures the Next Epidemic?

December 17, 2020

By: Howard A. Fischer

As trucks roll out across the nation with the initial doses of the Covid-19 vaccine, companies that regularly report with the Securities and Exchange Commission (“SEC”) should be aware of another rollout related to the pandemic – that of SEC actions related to disclosures about the effect of COVID-19.

The SEC recently announced settled charges against The Cheesecake Factory, relating to the adequacy of its public disclosures of the effect of the pandemic on their business.  Please click here for the settled administrative Order. This is likely a harbinger of additional cases relating to failures to accurately disclose the effects of the COVID pandemic on business operations.

The SEC charged The Cheesecake Factory for making misleading statements in SEC filings about the sustainability of their operations during the pandemic. Notably, the company had shared more pessimistic, and arguably, more accurate, information with private equity investors and other lenders it had contacted for capital infusions.

Two potential takeaways can be drawn from this settlement. First, issuers cannot make different disclosures to different audiences. Public filings must match private disclosures. If companies are seeking or  have sought private financing to assist them during the pandemic, and made disclosures to those audiences that are not mirrored in public filings, they are potentially risking an SEC enforcement action.

Second, this settlement was very favorable to the company - a small dollar amount settlement and relatively minor "books and records" charges. With a rapid turnover of high-level enforcement personnel as well as Biden's likely appointment of a more aggressive Chair, further enforcement actions will likely see more aggressive sanctions sought. Reading between the lines, the SEC might also have been reluctant to cause further financial distress to an already troubled company; the same

Companies with public reporting obligations (especially those seeking financing) should be aware of this recent case, and the potential for more aggressive enforcement actions relating to pandemic disclosures in the near future.